systemic risk buffer and the macro - prudential elements from pillar 2. these instruments are designed to help cool credit - led booms and / or provide additional buffers in downturns to mitigate credit crunches. there is some scepticism in academic circles as to the effectiveness of these tools, but a recent study on the spanish experience with dynamic provisioning suggests we should be more optimistic. it finds that the buffers created by dynamic provisioning somewhat dirk schoenmaker ( 2011 ) “ the financial trilemma ” in economic letters, 111, pp. 57 – 9. bis central bankers ’ speeches contracted credit availability in good times and helped expand it in bad times. the reason these provisions were insufficient to stop the credit boom was that they needed to be applied more evenly and aggressively. 2 the second change is related to decision - making. as a european decision - maker, the ssm will be able, if needed, to apply prudential measures to banks in both borrowing and lending countries. this is important because, to the extent that macro - prudential measures mitigate credit booms by raising banks ’ cost of equity, this effect can be offset if there are large inflows from abroad that lower banks ’ cost of debt. indeed, one can suppose that this was an additional reason that dynamic provisioning in spain was not enough to avert the credit boom and the housing bubble. the ecb ’ s comprehensive assessment of the main european banks taken together, i am confident that these institutional and macro - prudential changes will help strengthen financial governance in the euro area. we will have the right supervisory powers at the right level of action – the european level. before we start actually our supervisory tasks we will conduct a comprehensive assessment of the significant banks in the euro area. this assessment will consist of three elements. first, a supervisory risk assessment which will identify the key risks in banks ’ balance sheet ; second, a point - in - time asset quality review ( aqr ) to enhance transparency over asset quality, provisioning and capital ; and third, a stress test to examine the resilience of banks ’ balance sheet to stressed scenarios. the assessment will conclude with a single disclosure of the outcomes, which will be published before the ecb assumes its supervisory role in november 2014. as the ecb has recently released a communication about this exercise, i will not go into more detail on its features today. let me however stress that the exercise

as long as inflation expectations stay well - anchored, it will be hard for inflation to fall further. putting these factors together along with my forecast of a gradual pickup in real economic activity, my outlook is for inflation to drift back toward our 2 percent objective over the medium term. however, much like the case of the real growth outlook, there is significant uncertainty around this forecast. monetary policy so what does this all imply for monetary policy? as you are aware, at last week ’ s fomc meeting we made no changes to our monetary policy. in particular, the committee decided to continue to purchase long - term treasury securities and agency mortgage - backed securities bis central bankers ’ speeches at a monthly pace of $ 45 billion and $ 40 billion, respectively. the fomc statement reaffirmed the committee ’ s intention “ to continue its purchases of treasury and agency mortgage - backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. ” 2 we also reaffirmed our forward guidance with respect to the federal funds rate. the statement notes that the committee, “ currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6 - 1 / 2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee ’ s 2 percent longer - run goal, and longer - term inflation expectations continue to be well anchored. ” 3 several questions have emerged following the meeting. most noteworthy was – given that market expectations were skewed towards anticipating the beginning of a taper at this meeting – why the committee did not begin to reduce the pace of asset purchases. although i can ’ t speak for the committee, i can provide some reasons for my own decision. to begin to taper, i have two tests that must be passed : ( 1 ) evidence that the labor market has shown improvement, and ( 2 ) information about the economy ’ s forward momentum that makes me confident that labor market improvement will continue in the future. so far, i think we have made progress with respect to these metrics, but have not yet achieved success. with respect to the first metric, we have seen labor market improvement since the program began last september. over this time period, the unemployment rate has declined to 7. 3 percent from 8. 1 percent. 4 however, at the same time,