will review the asset purchase program regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices. in particular, we remain unwaveringly committed to price stability, and we are confident that we have the tools to be able to smoothly and effectively exit from the current highly accommodative policy stance at the appropriate time. our ability to pay interest on reserve balances held at the federal reserve banks will allow us to put upward pressure on short - term market interest rates and thus to tighten monetary policy when needed, even if bank reserves remain high. moreover, we have developed additional tools that will allow us to drain or immobilize bank reserves as needed to facilitate the smooth withdrawal of policy accommodation when conditions warrant. if necessary, we could also tighten policy by redeeming or selling securities. as i am appearing before the budget committee, it is worth emphasizing that the fed ’ s purchases of longer - term securities are not comparable to ordinary government spending. in executing these transactions, the federal reserve acquires financial assets, not goods and services ; thus, these purchases do not add to the government ’ s deficit or debt. ultimately, at the appropriate time, the federal reserve will normalize its balance sheet by selling these assets back into the market or by allowing them to run off. in the interim, the interest that the federal reserve earns from its securities holdings adds to the fed ’ s remittances to the treasury ; in 2009 and 2010, those remittances totaled about $ 125 billion. fiscal policy fiscal policymakers also face significant challenges. our nation ’ s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession. to a significant extent, this deterioration is the result of the effects of the weak economy on revenues and outlays, along with the actions that the administration and the congress took to ease the recession and steady financial markets. however, even after economic and financial conditions return to normal, the federal budget will remain on an unsustainable path, with the budget gap becoming increasingly large over time, unless the congress enacts significant changes in fiscal programs. for example, under plausible assumptions about how fiscal policies might evolve in the absence of major legislative changes, the congressional budget office ( cbo ) projects the deficit to fall from its current level of about 9 percent of gross domestic product ( gdp ) to 5 percent of gdp by 2015, but then to rise to about 6 1

daniel k tarullo : lessons from the crisis stress tests speech by mr daniel k tarullo, member of the board of governors of the federal reserve system, at the federal reserve board international research forum on monetary policy, washington dc, 26 march 2010. * * * effective responses to dire situations often require bold actions that would be unthinkable in calmer times. so it was in the financial crisis, when central banks undertook extraordinary monetary policy measures and governments made major financial firms wards of the state. yet sometimes a crisis also accelerates adoption of policies and practices that might beneficially have been implemented beforehand and then are sensibly continued after the crisis has passed. this evening i will examine an instance of this latter phenomenon, as defined by the federal reserve ’ s experience with comprehensive stress testing of major financial institutions during the crisis. the supervisory capital assessment program ( scap ) was fashioned in early 2009 as a key element of a crucial plan to stabilize the u. s. financial system. the stress tests, as they have been popularly called, required development on the fly, and under enormous pressure, of ideas that academics and supervisors had been considering for some time. after describing the concept, design, and implementation of last year ’ s tests, i will explain how our experience has helped prompt major changes in federal reserve supervision of the nation ’ s largest financial institutions. then i will discuss how this experience has stimulated debate over the merits of publicly releasing supervisory information. 1 origins and execution of the supervisory capital assessment program by february 2009, many steps had already been taken to restore the health of, and confidence in, u. s. banks. the u. s. treasury had injected capital into banks under the troubled asset relief program ( tarp ). the federal deposit insurance corporation had expanded guarantees for bank liabilities under its temporary liquidity guarantee program. and the federal reserve had established a number of lending programs to provide liquidity to financial institutions in addition to its aggressive monetary policy actions. despite these actions, a great deal of uncertainty remained about future bank losses and solvency, which was only increased by the rapidly deteriorating macroeconomic conditions in early 2009. the treasury determined that confidence could best be restored by making additional capital available to banks that were unable to raise from private sources the amounts necessary for them to continue to function as effective financial intermediaries even if economic conditions worsened appreciably. to evaluate how much capital individual institutions might require, u. s. bank supervisors, led