growth, with binghamton university playing a key role in fostering local business activity. and, like many places dealing with steep manufacturing job losses, there is a large swath of displaced workers that need assistance returning to the labor market. this has proved challenging and remains a priority. update on puerto rico on balance, i think it ’ s fair to say that the economic news from much of the second district has been quite positive. an important exception, though, has been the fiscal crisis faced by the commonwealth of puerto rico, home to 3. 5 million u. s. citizens. unfortunately, puerto rico continues to struggle under the weight of economic stagnation, employment declines and outmigration. this year, the government has been unable to make its debt payments on schedule and has lost access to the public debt markets. the pressures that culminated in these missed payments have been building for some time. this is an issue that we have been focused on for several years. we have published a number of reports in order to help highlight challenges and opportunities, to inform the discussion around solutions. i have visited puerto rico on several occasions, and had the opportunity to talk to residents and hear about the challenges they face. as an outgrowth of one of these trips – taken in 2011 – i commissioned my staff to produce a report on the competitiveness of the island ’ s economy. we released this report in 2012, and it served, i believe, a useful purpose in providing technical analysis and identifying some important issues deserving of policy attention. over the following two years, the island ’ s fiscal problems worsened. consequently, in 2014 we published an update to the initial report – this time focusing on the island ’ s public finances – and again offering suggestions for consideration. in june, congress and the obama administration took action providing a framework to help address the commonwealth ’ s fiscal crisis. part of that agreement re - emphasized that the commonwealth ’ s fiscal sustainability depends crucially on an expanding economy. in an effort to continue to shed light on the important issues, last week we published in our liberty street economics blog a five - part series entitled “ restoring economic growth in puerto rico. ” some important conclusions emerged from our analysis, and i want to emphasize those today. first and foremost, puerto rico ’ s current level of public debt is unsustainable. achieving fiscal sustainability requires real reforms and a significant adjustment to the commonwealth ’ s debt burden, as congress and the administration have recognized. to illustrate this point

document further raises the bar when it comes to recognizing the effects of double default in credit risk, modeling counterparty credit risk in an integrated manner that recognizes portfolio effects and improving the modeling of market risk, particularly as it relates to the growing exposure to credit - like risks within the trading book. basel ii already has had a particularly strong impact in improving the way the industry assesses its exposure to operational risk. before the issuance of the advanced measurement approach, many firms did not consider operational risk to be a discipline in its own right, as they did market and credit risk. operational risk tended to be managed in a decentralized manner at the level of individual business lines and it was largely based on qualitative considerations. for many firms, operational risk really was focused on managing back - office operations and processes. with the introduction of the ama, supervisors introduced a much more comprehensive framework for how firms should go about measuring and managing operational risk. firms are required to have a much more comprehensive definition of what constitutes operational risk, including not only processing errors, but also business disruptions, legal and compliance risks and fraud, whether from internal or external sources. as with market and credit risk, firms are expected to supplement the management of operational risk at the business line level, with an independent operational risk management function that is responsible for establishing firmwide policies for measuring and managing operational risk. finally, firms are required to bring together quantitative elements, such as internal and external loss data, with qualitative elements, such as control self assessments and scenarios, to arrive at a reasoned assessment of their exposure to operational risk losses across the firm. internal rating systems, credit risk mitigation and operational risk measurement are merely a few of the examples of how basel ii has already spurred improvements in bank risk management and how final implementation will bring further discipline to risk management practice. supervisors also will have to make judgments about the effectiveness of the models and associated procedures that banks intend to use for regulatory capital purposes. a key element in making such judgments is the so - called “ use test ” which requires that banks ’ regulatory capital models build on the models that they use for internal risk management purposes. this is a necessary condition for supervisors to have confidence in the integrity of banks ’ regulatory capital models. additionally, pillars ii and iii give added impetus to comprehensive improvements in bank management practice. under pillar ii, supervisors will assess the integrity of banks ’ internal economic capital models - focusing on aspects that are not well - captured in the pillar