- time evaluations derived from transaction validation and valuation - oriented banking supervision became insufficient to ensure that banking organizations, particularly large complex banking organizations, were operating in a safe and sound manner. moreover, the increased complexity and volume of financial transactions across the largest institutions began to significantly strain examiner resources. along with financial innovation, the risk management systems of banking organizations also began to evolve around this time because of advances in information technology, which significantly reduced the cost of obtaining and analyzing data and increased the sophistication of risk management models. more sophisticated risk management systems gave banking institutions a more accurate view of their risk - adjusted returns on capital. value - at - risk models were adopted to measure expected losses at given levels of probability, and financial products such as swaps and other derivatives were used to manage interest - rate risk more effectively. on the credit side, where banks already had access to considerable information about their borrowers, more sophisticated risk - modeling techniques complimented management ’ s views on credit risk. these models include credit scoring for consumer lending and kmv models for corporate financing, which estimate option - based pricing models and information contained in stock prices with the probability of default. as a result, the evolution of the industry in the 1990s rendered our traditional point - in - time, transaction validation, and valuation - based supervisory system inadequate. at the same time, the advancements in risk measurement in the industry allowed supervisors, when evaluating bank soundness, to rely more directly on information from banks ’ own internal risk management systems. doing so, however, necessitates testing these systems, and thus our current model of risk - focused supervision was developed. at its core, risk - focused supervision is a relatively simple concept : supervisors are expected to concentrate their efforts on ensuring that financial institutions use the processes necessary to identify, measure, monitor, and control risk exposures. given the risk profile of u. s. banking organizations, risks are divided into six categories : credit, market, liquidity, operational, legal, and reputational. more time has been allocated to the examination planning process, in which supervisory teams assess the most important risks facing the organization and structure their examination activities around assessing and testing the adequacy of it ’ s management of those important risks. thus, in the application of risk - focused supervision in the united states, our examiners verify the adequacy of the banking organization ’ s risk management systems, including whether they have an appropriate degree of transaction testing. one

responses. previously this reflected a rise in expectations for significantly above - target inflation, but now that dispersion also reflects expectations on the part of one quarter of respondents that prices are likely be the same or below their current level 5 to 10 years in the future. in order to bring inflation down and to keep inflation expectations solidly anchored at 2 percent, the federal reserve has increased the federal funds rate target range by 300 basis points in the past seven months, and both market and policymaker surveys indicate additional increases through the end of this year and into next year. in addition, balance sheet shrinkage is now proceeding at its maximum rate, reinforcing the move to a restrictive stance. broader u. s. financial conditions have tightened rapidly in response : the two - year treasury yield has moved above 4 percent for the first time since 2007, and the 10 - year yield is near its highest level in over a decade at 3. 9 percent. corporate bond yields have risen even more, as investment - and speculative - grade corporate bond spreads have increased about 80 basis points and 170 basis points, remained at 2 percent throughout the surveys conducted thus far in 2022. see https : / / www. philadelphiafed. org / surveys - and - data / real - time - data - research / survey - of - professionalforecasters. for additional information, see https : / / data. sca. isr. umich. edu. - 7respectively, over the year. mortgage rates have more than doubled since the beginning of the year. the board ’ s broad dollar index has appreciated 11 percent year to date. 13 monetary policy tightening is also proceeding rapidly abroad. many central banks in large economies have raised rates by 125 basis points or more in the past six months, and yields on 10 - year sovereign debt in canada, the united kingdom, and the largest euro area economies have seen increases on the order of 190 to 360 basis points this year. 14 the combined effect of concurrent global tightening is larger than the sum of its parts. the federal reserve takes into account the spillovers of higher interest rates, a stronger dollar, and weaker demand from foreign economies into the united states, as well as in the reverse direction. we are attentive to the risk of further adverse shocks — for instance, from russia ’ s war against ukraine, the pandemic, or china ’ s zero - covid policies. and we are also very aware that the cross -