at levels high enough for the firms to withstand such losses and still remain viable financial intermediaries. this forward - looking aspect of stress testing automatically builds capital, and boosts resilience, in the face of weakening loan - underwriting standards because, for any given adverse scenario, weaker underwriting standards will imply higher losses. also, because the firms are stressed simultaneously, supervisors are able to identify and take account of correlated exposures and other common risks. 11 the firms covered by the dodd - frank act supervisory stress tests account for more than 70 percent of u. s. banking sector assets, thus approaching sir andrew ’ s standard of a supervisory perspective that examines the assets of the financial system as a whole. the effectiveness of stress testing as a macroprudential tool depends, of course, on how the tests are constructed. for example, a macroprudential perspective must inform the construction of the scenarios against which the assets and revenues of the banks are stressed. such a perspective argues for incorporating particular risks to the financial system even when there is some uncertainty regarding the probability of a particular risk being realized. for example, the scenario might include a sharp drop in house prices if analysis suggested – but did not confirm – that there was overheating in the housing market, and if supervisors judged that large banks had correlated exposures to the housing sector. that is, the stress tests provide for resiliency in the event the risk comes to pass, without necessarily requiring other measures to restrict directly the lending or other activity lying behind the risk. a macroprudential perspective also counsels against injecting more procyclicality into the financial system by, for example, simply assuming a standard deterioration in economic conditions from whatever the baseline projections might be. such an approach would overlook the tendency of systemic risk to build during strong, prolonged expansions, when underwriting standards decline, rising asset prices make secured lending seem safer, and defaults wane. the approach we are instead taking is that, under such conditions, our severely adverse scenario would assume a level of unemployment during the stress period comparable to that observed in past severe recessions, not simply an increase in unemployment comparable to the increase observed during those recessions. 12 thus, the it is important to emphasize here, as we do in our annual capital reviews of large banking organizations, that our supervisory stress testing of all covered firms simultaneously does not supplant the need for firms to develop, and make capital decisions dependent upon

at present, and inflation expectations had subsided to target by the turn of the year. treasury debt has declined steadily since 2011, and the outlook is for this trend to continue in the years to come. household and corporate debt levels have also declined markedly. the ratio of household debt to disposable income is now roughly at 2005 levels, and the ratio of corporate debt to gdp is at its lowest since mid - 2004. iceland ’ s external position has proven to be sustainable. the trade surplus has been around 8 % of gdp since 2009. this is the longest continuous period with a surplus over 5 % of gdp in the history of the data, which extend back to 1875. the current account balance as a whole has averaged 5. 5 % of gdp per year ; that is, excluding the effects of the failed banks and other factors that do not reflect iceland ’ s financial burden. the current account balance has reduced iceland ’ s debt, cutting underlying net external debt almost in half since year - end 2008, to about 45 % of gdp by the end of 2014. but all of this does not change the fact that iceland still faces a balance of payments problem, which is reflected in the fact that a too large share of its debt is too short - term, and a part of the debt takes the form of possibly volatile isk assets held by non - residents. this situation could put substantial pressure on the bis central bankers ’ speeches exchange rate or the central bank ’ s foreign exchange reserves if these isk assets were free to exit the country. the three new commercial banks have also performed well in a number of areas, as can be seen in various indicators, including their capital ratios, which have risen from a 2009 average of 16 % to last year ’ s average of nearly 29 %. the initial foreign currency mismatches in their balance sheets have been reduced are now within the limits provided for in central bank rules, and their domestic and foreign liquidity positions have improved. but the banks are operating in the shelter of the capital controls, and looking ahead, questions concerning their size and efficiency remain to some extent unanswered. many factors have been favourable for us in spite of global headwinds, which were initially reflected in a marked deterioration in terms of trade and are still reflected in a weak economic recovery among our trading partners. looking back at the three challenges i mentioned a moment ago, we can say in broad terms that the macroeconomic goals have been met thus far. the financial