Median household income was roughly $ in 2009, moderately above the statewide median and well above the nation’s. Not surprisingly, then, the poverty rate is lower than the U.S. average – 11 percent versus 14 percent nationally.   Your residents are highly educated. Educational attainment – a critically important driver of economic activity – is also well above the national average. A third of adults who live in the Albany area hold college degrees. One of Albany’s key strengths is its higher education industry. The colleges and universities in the capital region help stabilize the local economy during downturns and recoveries. Indeed, the private education sector continually added jobs before, during, and after the  3  Quarterly Report on Household Debt and Credit, August 2011. BIS central bankers’ speeches  5  Great Recession, both nationally and locally. For example, the University at Albany has taken a lead role in shaping the next generation of financial professionals and regulators through its pioneering curriculums. From my perspective at the Fed, a particularly important and timely example is the University’s innovative National Science Foundation-supported program for instruction and research in financial market regulation. Research conducted by the New York Fed has shown that colleges and universities can help build the skills and education of their region’s workforce, which is critical to an area’s ultimate economic success.4 They do this in two ways. Most directly, colleges and universities support an educated workforce by producing new college graduates, some of whom will stay and work in the area.

How can research help address these issues and, more generally, improve the overall supervisory stress testing regime? I want to suggest two general areas of research – one tactical and the other much bigger picture and strategic. The tactical area is research that helps improve supervisory models. First, developing additional ways of projecting revenues and non-credit expenses in stressed environments is a particularly ripe area for additional work, in my view. As I noted, an important innovation in the SCAP was the recognition that a comprehensive stress test focused on net income needed to incorporate projections of interest and non-interest income and non-interest expense. While a number of models already existed for making such projections – for instance, those used by banks in their budgeting and planning processes – these were nearly all calibrated to produce projections assuming business as usual conditions, rather than the stressed environment assumed in the SCAP. The SCAP PPNR projections were thus based on stylized supervisory models that used available historical data on bank performance during recessions. Since then, the supervisory PPNR models have become considerably more sophisticated, but at their heart, they continue to rely on historical outcomes for revenues and expenses, rather than fully incorporating the fundamental drivers of those outcomes at the business line level. Additional research and data 5/8  BIS central bankers' speeches  collection on these fundamental drivers and their performance under stress could make the PPNR projections more robust to changing business strategies and focus. A second tactical research area concerns measuring model risk.