policy coordination in areas such as fiscal policy. putting all the countries using the euro on a clearly sustainable fiscal path would help restore market confidence. assuming that europe ultimately succeeds in managing this situation, a stronger union will emerge that will be viewed as more robust and resilient. this would be a welcome development for the u. s. if, in contrast, europe were not to be fully successful in charting an effective course, this could have a number of negative implications for the u. s. in particular, there are three possibilities that i would like to highlight for the subcommittee today. first, if the european situation were to deteriorate, then the euro area would face even more serious fiscal and economic challenges. as a result, growth within the euro zone would bis central bankers ’ speeches weaken and this would lead to less demand for u. s. goods and services that are exported to europe from companies and workers here. this would hurt growth here in the united states and would have a negative impact on u. s. jobs. it is important to recognize that the euro area is the world ’ s second largest economy after the u. s. and an important trading partner for us. also, europe is a significant investor in the u. s. economy, and vice versa. thus, what happens in europe has significant implications for our economy. second, if the european situation were to deteriorate, this could put pressure on the u. s. banking system. the good news is that u. s. banks are much more robust and resilient than they were a few years ago. u. s. banks have bolstered their capital significantly, built up their loan loss reserves and have significantly larger liquidity buffers. also, the direct exposures of u. s. banks to the countries in europe that are facing the most intense fiscal challenges are actually quite modest. the bad news is that the exposures of the u. s. banks climb quite sharply when one also considers the exposures to the core european countries and to the overall european banking system. this means that if the crisis were to broaden further and intensify, this could put greater pressure on u. s. banks ’ capital and liquidity buffers. third, if the european situation were to deteriorate further, financial markets would likely become more stressed. this could tighten the availability of credit to u. s. households and businesses. it could also cause equity prices to fall and this would

be able to continue to finance their u. s. dollar assets. if the access to dollar funding were severely impaired, this could necessitate the abrupt, forced sales of dollar assets by these bis central bankers ’ speeches banks, which could seriously disrupt u. s. markets and adversely affect u. s. businesses, consumers and jobs. one way we can help to support the availability of dollar funding is by engaging in currency swaps with other central banks. this has been used as a policy tool dating back to 1962. recently, the federal open market committee decided to re - launch this tool, cooperating with five other central banks. our intention is to create a credible backstop to – but not supplant – private markets. banks with surplus dollars are more likely to lend to banks in need of dollars if they know that the borrowing bank will be able to obtain the dollars it needs to repay the loan, if necessary, from its central bank. this action is designed to support financial stability, avoid an unnecessary tightening in financial conditions and support economic activity and jobs in the united states. in particular, by reducing the cost of dollar funding via the swap lines last month, we reduced the pressure on banks in europe to abruptly liquidate their u. s. dollar assets. thus, this step will help to insulate u. s. markets from the pressures in europe and support the availability of credit to u. s. households and businesses. european banks are particularly active in areas such as trade finance, project finance, energy lending and municipal finance – a sharp contraction of the financing they provide would be harmful for the u. s. economy as a whole including for u. s. exporters, firms working on infrastructure projects, the energy industry and hardpressed state and local governments across the country. u. s. financial institutions currently do not face difficulty obtaining liquidity in short - term funding markets. however, were conditions to deteriorate, the federal reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to u. s. households and businesses. in sum, i am hopeful that europe can effectively address its current fiscal challenges. the federal reserve is actively and carefully assessing this situation and the potential impact on the u. s. economy. at this time, although i do not anticipate further efforts by the federal reserve to address the