severely adverse economic conditions. second, the act requires both these companies and certain other regulated financial firms with assets between $ 10 billion and $ 50 billion to conduct internal stress tests. the federal reserve must publish a summary of results of the supervisory stress tests and issue regulations requiring firms to publish a summary of the company - run stress tests. regular and rigorous stress testing provides regulators with knowledge that can be applied to both microprudential and macroprudential supervision efforts. disclosure of the general methodology and firm - specific results of our stress testing has additional regulatory benefits. first, the release of certain details about assumptions, methods, and conclusions exposes the supervisory approach to greater external scrutiny and discussion. such discussions will almost surely help us improve our assumptions and methodology over time. second, because bank portfolios are difficult to value without a great deal of detailed information, the stress test results should be very useful to investors in and counterparties of the largest banking firms. further, i believe the demands of supervisors for well - specified data and projections from firms have improved risk management at these firms. the stress testing that the federal reserve has instituted during the past few years has become an important part of our horizontal, interdisciplinary approach to supervising the largest bank holding companies. firm - specific capital planning has also become an important supervisory tool. in november 2011, the federal reserve issued a new regulation requiring large banking organizations to submit an annual capital plan. this tool serves multiple purposes. first, it provides a regular, structured, and comparative way to promote and assess the capacity of large bank holding companies to understand and manage their capital positions. second, it provides supervisors with an opportunity to evaluate any capital distribution plans against the backdrop of the firm ’ s overall capital position, a matter of considerable importance given the significant distributions that some firms made in 2007 even as the financial crisis gathered momentum. third, at least for the next few years, it will provide a regular assessment of whether large bank holding companies will readily meet the basel 2. 5 and basel iii capital requirements as they take effect in the united states. a stress test is a critical part of the annual capital plan review. but, as these three different purposes indicate, the capital plan review is about more than using a stress test to determine whether a firm ’ s capital distribution plans are consistent with remaining a viable financial intermediary in adverse economic conditions. as indicated during our capital plan reviews in both 2011 and 2012, the federal reserve may object to a capital plan because of significant def

, like those of thornton and bagehot, were quite old, but some reflected relatively recent research. for example, recent work on monetary policy helped the federal reserve provide further policy accommodation despite the constraints imposed by the zero lower bound on interest rates. 8 the federal reserve did so by, for example, ( 1 ) acting rapidly when confronted with the zero lower bound, as discussed in david reifschneider and john c. williams ( 2000 ), “ three lessons for monetary policy in a lowinflation era, ” journal of money, credit and banking, vol. 32 ( november ), pp. 936 – 66 ; ( 2 ) providing forward guidance regarding short - term interest rates, as discussed in gauti eggertsson and michael woodford ( 2003 ), “ the zero bound on interest - rates and optimal monetary policy, ” brookings papers on economic activity, vol. 2003 ( 1 ), pp. 139 – 211 ; and ( 3 ) expanding the federal reserve ’ s balance sheet through purchases of longer - term securities, as discussed in ben s. bernanke, vincent r. reinhart, and brian p. sack ( 2004 ), “ monetary policy alternatives at the zero bound : an empirical assessment, ” brookings papers on economic activity, vol. 2004 ( 2 ), pp. 1 – 78. economics and economic research in the wake of the crisis economic principles and research have been central to understanding and reacting to the crisis. that said, the crisis and its lead up also challenged some important economic principles and research agendas. i will briefly indicate some areas that, i believe, would benefit from more attention from the economics profession. most fundamentally, and perhaps most challenging for researchers, the crisis should motivate economists to think further about their modeling of human behavior. most economic researchers continue to work within the classical paradigm that assumes rational, selfinterested behavior and the maximization of “ expected utility ” – a framework based on a formal description of risky situations and a theory of individual choice that has been very useful through its integration of economics, statistics, and decision theory. 9 an important assumption of that framework is that, in making decisions under uncertainty, economic agents can assign meaningful probabilities to alternative outcomes. however, during the worst phase of the financial crisis, many economic actors – including investors, employers, and consumers – metaphorically threw up their hands and admitted that, given the extreme and, in some ways, unprecedented nature of the