Unprecedented economic prosperity At the dawn of the twenty-first century, we find ourselves at an unprecedented moment in the nation’s economic history. The US economy has just completed its 37th consecutive quarter of expansion, the unemployment rate is at its lowest level in three decades and labor force participation by our adult population is at its highest rate since the Second World War, when these statistics included the millions of Americans in uniform. Meanwhile, inflation has remained all but dormant, something thought not to be possible when the economy is growing so rapidly and unemployment is so low. Our prosperity is the envy of the world, and our economic model is acknowledged everywhere to be one that works. It’s not perfect, nor is it applicable in every detail to countries with different histories, cultures and values. Still, it is clear that in the longer run the market is better at allocating scarce resources than any version of a command economy. Importance of maintaining sound credit standards The remarkable duration of the current economic expansion and the strength of the banking system are not coincidental events. Without an effectively functioning banking system for encouraging, collecting and deploying society’s savings in a fair and impartial way into productive investments, there would be little hope for our economy, or any other, to mobilize the real resources necessary for economic growth and stability. With this in mind, one of my major concerns going forward is the quality of bank lending.

We at the Federal Reserve, along with our domestic and international colleagues, are working hard to devise a flexible, multi-faceted strategy that emphasizes prudence and problem prevention, compatibility with the market, and a close and cooperative working relationship between the private and public sector. With these priorities in mind, I believe there are three essential elements of a modern supervision framework - effective bank-level management, market discipline and official supervision. Effective bank level management includes sound corporate governance, rigorous internal controls and effective risk management. Together these elements represent the first and most important line of defense against potential problems. This is increasingly the case as the activities of banks and other financial institutions become more complex and more global. The second line of defense against financial instability is market discipline, which has become an increasingly important ally of the official supervisor. Of course, effective market discipline is not possible without meaningful public disclosure and more selective additional disclosure to counterparties. While significant progress has been made in recent years, it unfortunately remains the case that disclosure practices have not kept pace with the rapid changes in banks’ business activities and risk exposures, and how these exposures are measured and managed. For this situation to be fully remedied, notions of what is proprietary information and what should be in the public domain need to change. Knowing a company’s appetite for risk and its approach to, and methodologies for, managing risk is essential to understanding the risks of being a shareholder, a creditor or a counterparty.