s official reserves in hang seng index constituent stocks and futures contracts in sufficient quantities to ensure that the strategy failed. we followed this up with technical changes to the currency board system to make it less susceptible to manipulation. the results of our market operation in august and our technical measures in september have been stable interest rates and financial markets that have been free of the manipulation that posed such a threat to stability and confidence over the summer. for an economy that is still working its way through its worst recession in more than a generation this is good news. many critics, however, were shocked by what they saw as a gross violation of free - market principles in a city that had been held up as one of the world ’ s great models of free - market economics. we did not, and do not, see it in this way. and, six months or so after the event, now is perhaps an appropriate time to place the events of last summer in some perspective. free markets 14. what, then, is a free market? it might be helpful to go back to basic economics to set out a few simple principles. in bald terms, a free market is a market in which buyers and sellers are free to trade on whatever terms they wish without government interference. the great writers on free markets, from adam smith to milton friedman, argue that free markets and free enterprise, rather than governments or monopolies, are the most efficient means of producing and distributing wealth and, as a consequence, the soundest basis for a just and prosperous society. in adam smith ’ s conception, it is the ‘ invisible hand ’ of the free market that organises the seemingly chaotic and self - interested activities of human beings into a beneficent and productive social order. for milton friedman, ‘ the organisation of the bulk of economic activity through private enterprise operating in a free market ’ is ‘ a necessary condition for political freedom. ’ 15. in its daily operation, a free market serves three main purposes. it manages resource allocation by supplying answers for buyers and sellers to the basic economic questions of what, how, and for whom goods and services are to be produced. it provides price discovery by channelling competition and adjusting prices to reflect changes in supply and demand for different commodities. and specifically in terms of money, it arranges financial intermediation by matching the needs of ultimate lenders – or those in possession of surplus loanable funds – with those of ultimate borrowers – or those in need of liquid funds :

supervision of community banks, for which the federal reserve implemented a new examination program in january 2014. 21 while we have traditionally applied a risk - focused approach to consumer compliance examinations, the new program more explicitly links examination intensity to the individual community bank ’ s risk profile. here again, the scale of community banks is directly relevant to supervisory choices. community banks do not have large, standardized systems for dealing with many customers across a far - flung geographic footprint. they do have much more direct contact between customers and bank management. the new program calls for examiners to spend less time on low - risk compliance issues at community banks. in addition, we revised our consumer compliance examination frequency policy to lengthen the time between on - site consumer compliance and community reinvestment act examinations for many community banks with less than $ 1 billion in total consolidated assets. a second implication of supervisory tiering is that supervision must not inadvertently undo the decisions made through regulatory tiering. this point raises the oft - cited concern about “ supervisory trickle down, ” whereby supervisory expectations – or even regulatory requirements – formulated for larger banks are de facto applied in part to community banks. the concern has been particularly acute in the context of capital stress testing, though it is by no means limited to that area. let me repeat here what all three federal banking agencies have explained in the clearest possible terms, both publicly, in examiner training, and in oneon - one discussions with bankers : that dodd - frank act stress test ( dfast ) and comprehensive capital analysis and review requirements and expectations for enterprisewide capital stress testing do not apply to community banking organizations, either explicitly or implicitly. 22 for example, while it may be sensible supervisory practice to inquire of a growing $ 9 billion bank if it has begun thinking about how it would meet dfast requirements should it reach the current $ 10 billion statutory threshold, that bank does not need to start meeting those requirements until it has actually crossed the threshold. and there is simply no reason for examiners to make a $ 5 billion bank begin to develop capital stress testing capabilities. third, the relatively straightforward business model of community banks, along with their relatively small scale and number of branches, provides the opportunity to increase the use of off - site supervisory oversight, in accordance with informing principles of risk - based supervision. for example, last year we pilot - tested a voluntary program under which some aspects of the loan review process were conducted off - site, relying on the bank ’ s electronic records