test of the fed ’ s supervision of large banks. in these remarks, i will first sketch out how changes in regulation, risk management, the economy, and overall financial stability have prompted alterations to stress tests over the past decade. much of that change has enhanced transparency, which is a founding principle for stress tests. i will then suggest some ways in which the effectiveness of stress testing can be further enhanced with greater transparency. ten years ago, in may of 2009, the fed and the treasury department released the first stress test results under the supervisory capital assessment program ( scap ). at that moment, the u. s. economy was in free fall. the united states had lost an astonishing three million jobs in the previous four months. one significant reason for these losses was that many businesses were severely constrained in their access to funding and found it impossible to predict when that access might improve. the goal of the first test was urgent and simple : to restore confidence in the 19 large banks that then accounted for two - thirds of the assets in the banking system. in fact, simply announcing in march that there would be tests helped stabilize bank finances. that improvement continued after the results in may outlined the quite feasible steps for raising additional capital that the banks would need to take, and did take, to be able to continue lending if adverse conditions continued. challenging conditions did continue, but the stress tests and other actions taken in the first half of 2009 marked a turning point. the recovery from the great recession began in july, as the financial system came back to life, and then steadily strengthened. the principles that made that first test so effective were independence and transparency. for the first time, an independent authority, the federal reserve, would seek to independently assess risks. 1 just as important, the details of that assessment would be shared with the public, an extent of transparency that until then wasn ’ t characteristic of bank supervision but would become the hallmark of the regulatory framework erected in response to the crisis. the first tests relied heavily on banks ’ internal risk models, but they still represented a huge step in independence in providing the public with an assessment of the health and resiliency of large banks. transparency facilitated both market discipline and accountability. the information provided to the public under the scap stress test reinforced the entire enterprise of estimating the capital shortfall faced by major banks. it held the banks accountable for information on their capital adequacy and required them to fill the capital hole. the next big step for

real interest rates and crowding out effects, and to insure sustainability of public finances. if this challenge is not met, the current crisis is bound to be exacerbated by a sovereign debt crisis. • in the area of regulation a broad set of measures is under way and considerable progress has been made. but as signs of stabilisation in the financial system and the economy are emerging, reform appetite is waning and there is a risk of missing the opportunity of a paradigm shift in the financial system. • especially as the crisis intensified, central banks took immediate and unprecedented action by lowering rates to historically low levels and providing ample liquidity. • keeping interest rates too low for too long may well lay the basis for new imbalances and instability. central banks need to prepare for credible strategies to phase out their support and stand ready to prepare financial markets when they come to unwind their credit support measures. • in academic circles the financial crisis has revived the debate whether central banks, in the conduct of monetary policy, should pay more attention to financial variables, and specifically, whether inflation targeting strategies do not focus too narrowly on economic developments alone. relative to this the ecb ’ s monetary policy strategy has proved to be robust. the monetary pillar provides for discipline not to ignore risks to price stability stemming from imbalances in money and credit developments. • initiatives are now being taken to close the gap in the area of cross - border supervision and between micro - and macro prudential supervision. the envisaged establishment of the european systemic risk board ( esrb ) which the ecb will support analytically and logistically marks an important step in this direction. the esrb will monitor systemic risk and provide risk warnings and recommendations. effective cooperation and leadership at the european level will be crucial to make the esrb successful in the pursuit of its mandate. • is the current improvement in some financial market segments genuine or driven by governments and central banks? when the crisis took hold and risk aversion spread, leading to de - leveraging and a sharp decline in securitisation public attention focused on executive pay as an area for regulation. in fact improving corporate governance remains a key area for regulation. bonus systems need to be changed so as to make managers liable for their decisions and provide them with the right incentives to focus on longer - term sustainability of their business models rather than short - term profit. • but corporate governance is just one area where regulation needs to be improved. as just discussed