stifling reasonable risk - taking and innovation in financial markets, as these factors play an important role in fostering broader productivity gains, economic growth, and job creation. macroprudential policy at the federal reserve as i have mentioned, besides creating new institutions like the financial stability oversight council, the dodd - frank act has also imposed a macroprudential mandate on individual agencies, including the federal reserve. this mandate comes, in some cases, with changes in the powers and responsibilities of key agencies. in the case of the federal reserve, in addition to membership on the financial services oversight council, our new responsibilities include the supervision of thrift holding companies as well as oversight of nonbank financial firms and certain payment, clearing, and settlement utilities that the council designates as systemically important. in consultation with other agencies, we also are responsible for developing more - stringent prudential standards for all large banking organizations and for nonbank firms designated by the council as systemically important. these enhanced standards include tougher capital and liquidity requirements, the development of resolution plans ( so - called living wills ), mandatory stress tests conducted by the federal reserve and by the firms themselves, new counterparty credit limits, and more - demanding riskmanagement requirements. the federal reserve has made and will continue to make significant organizational changes as needed to best fulfill our responsibilities. even before the enactment of the dodd - frank act, we had begun to overhaul our supervision of the largest, most - complex financial firms. an important milestone in this regard was the federal reserve ’ s leadership in the spring of 2009 of the supervisory capital assessment program, popularly known as the bank stress test, which comprehensively evaluated the health of the largest banking organizations in the country. we learned valuable lessons from that exercise, including an appreciation of the additional insights that can be gained by examining a number of major institutions simultaneously, with a focus on comparative performance. another lesson of the stress test was the value of a multidisciplinary approach to supervision, one that combines the skills of economists, financial experts, payments systems analysts, and other specialists with those of supervisors and examiners. bis central bankers ’ speeches drawing on this experience, we created a high - level, multidisciplinary working group within the federal reserve to oversee the supervision of large financial institutions. under the auspices of this committee – called the large institution supervision coordinating committee, or liscc – federal reserve supervisors, supported by economists and other experts, now routinely

. the rate of growth of our economy has stepped down from the unsustainable pace of earlier this year. during such a period, potential risks emerge more clearly. first, we must be mindful that an unexpected slowdown might occur in the growth of productivity. as i said, i am cautiously optimistic that the rapid pace of productivity growth can be extended. however, we now know that an unexpected and unrecognized slowdown in productivity growth occurred in 1973. the causes are still debated, but we know that the slowdown contributed to " stagflation, " which emerged as employees demanded increased compensation, based on unrealistically high expectations of productivity growth and gradually rising inflation expectations, and employers granted those increases. to maintain profit margins, businesses then passed on those cost increases through to prices. this passthrough occurred as the rate of growth in the economy subsided. this is the reverse of the good news that we have experienced in this expansion. the second risk to good performance is that the investment boom, at least in some sectors, may overshoot. we are not only in the longest expansion in the history of our nation but also in the longest investment boom. expectations of future returns from capital may not materialize, and companies may find that they have over - invested in capital stock. other investment booms have ended with a pullback in investment that has slowed growth sharply, and we should be mindful that such an outcome is not impossible. indeed, the recent releveling of the stock prices of some high - tech companies may suggest that we are entering a period of reduced optimism about future profits and less rapid growth in business investment. the third risk is that the capital inflows from abroad that have been funding our domestic investments may dry up. the elevated stock market has reduced household savings. net government saving has increased greatly, in the form of the surplus at the federal, state, and local levels, but as a nation we also rely on capital inflows from overseas. capital inflows, as you know, are the counterpart of our record current account deficit. the gap between domestic savings and investment is large and growing, and if the inflow of foreign capital reversed suddenly, the consequences for our economy would be noticeable. a fourth risk arises from ongoing adjustments in financial markets to the perception of a riskier economic environment. over the course of this year, commercial banks have tightened their lending standards, and quality spreads have increased in