and made significant adjustments. in each stress test that has followed, and building upon the considerable progress in data collection, we have made completely independent estimates of a progressively greater proportion of potential net income or losses. these improvements in data and models have increased our ability to distinguish risks within portfolios. we have also refined the formulation of the hypothetical scenarios that form the basis of the stress tests. the severely adverse scenario is designed to reflect, at a minimum, the economic and financial conditions typical of a severe post - world war ii u. s. recession. 2 in devising recession scenarios, we draw on many of the same macroeconomic modeling tools used in making monetary policy. because not all significant risks facing banks are tied to the business cycle, our scenarios now incorporate other adverse developments such as an exceptionally large decline in house prices, sharp drops in the value of stocks and other financial assets, or a worsening of global economic conditions more severe than might normally be expected to accompany a deep recession in the united states. we have implemented the dodd - frank requirement for an “ adverse, ” as well as a “ severely adverse, ” scenario not by simply hypothesizing a milder recession, but by testing for somewhat different risks. the past two years we have used the adverse scenario to test the impact of a sudden, significant increase in interest rates. more discrete changes of note include the assumption of default by each firm ’ s largest counterparty and the incorporation of salient risks beyond those in the overall scenarios. 3 the former obviously serves a microprudential purpose, but it also could promote systemic stability objectives if it were to identify a single exceptionally large exposure for the entire financial system. the incorporation of salient risks helps to use stress tests to “ lean against the wind, ” not just build a buffer for future losses. for example, the 2011 and 2012 scenarios incorporated possible severe stress in europe. inclusion of this factor may have led to greater awareness and better risk management of u. s. firms ’ european exposures. dodd - frank act § 165 ( i ), 12 u. s. c. § 5365 ( i ). see board of governors of the federal reserve system ( 2013 ), “ policy statement on the scenario design framework for stress testing ( pdf ), ” final rule ( docket no. op – 1452 ), federal register, vol. 78 ( november 29 ), p. 71443. see board of governors of the federal reserve system (

christine lagarde : hearing at the committee on economic and monetary affairs of the european parliament introductionary speech by ms christine lagarde, president of the european central bank, at the econ committee of the european parliament ( by videoconference ), 19 november 2020. * * * madam chair, honourable members of the economic and monetary affairs committee, ladies and gentlemen, thank you very much for giving me the opportunity to speak to you today as part of our regular hearings. we continue to be confronted with serious circumstances, from both a health and an economic perspective. pandemics are highly infrequent and unpredictable events, and consequently the economic outlook is characterised by high uncertainty. the key challenge for policymakers will be to bridge the gap until vaccination is well advanced and the recovery can build its own momentum. in this situation, it is pivotal that public policies chart a clear way forward and inspire confidence in eu citizens. good public policies are what will allow us to persevere in these challenging times, and to do so, they need to be ambitious yet realistic. given the central role played by the european parliament in ensuring that eu policies work for eu citizens, i could hardly be in a better place to discuss the topics you have chosen for today ’ s hearing. first, i will comment on the evolving economic outlook and the impact of uncertainty on the economy. second, i will discuss the respective roles of the ecb ’ s monetary policy and of fiscal policy in the current environment. economic outlook, monetary policy and uncertainty while the latest news on the vaccine looks encouraging, the recent surge in coronavirus ( covid - 19 ) cases and the associated re - imposition of a number of containment measures are adding to the already heightened level of uncertainty and present a serious challenge to the euro area and the global economy. following a strong but partial and uneven rebound in real gdp growth in the third quarter, latest surveys and high - frequency indicators signal that euro area economic activity lost momentum going into the fourth quarter. the resurgence in covid - 19 infections is weighing on services sector activity in particular, which is especially vulnerable to the voluntary and mandatory social distancing measures introduced. the purchasing managers ’ index for the euro area shows that while manufacturing output continued to improve, services sector activity weakened further in october. this uneven impact is also evident across euro area countries, with those countries particularly dependent on tourism and travel affected the most. so far, government support measures, particularly short - time