program ”, press release, may 7 ; and ben s. bernanke ( 2009 ), “ the supervisory capital assessment program ”, speech delivered at the federal reserve bank of atlanta 2009 financial markets conference, jekyll island, ga., may 11. because most large financial firms are multinational, the development of an effective regime will require consultation and collaboration with authorities abroad. the federal reserve strongly supports ongoing congressional efforts to reform our financial regulatory framework, but we are not waiting for new legislation to make improvements. we have been working hard to strengthen our own oversight of financial institutions and to broaden our field of vision to include potential risks to the financial system as a whole as well as risks to individual firms. for example, we have played a key part in ongoing international efforts to ensure that systemically critical financial institutions hold more and higher - quality capital and have sufficient liquid assets on hand to be able to survive a market crisis. and we are leading the international and domestic initiative to push banking organizations of all sizes to ensure their compensation practices link pay to performance and do not encourage excessive risk - taking. to make our supervision more effective and better able to identify risks to the financial system as a whole, we are also making fundamental changes to our daily operations. for example, we have adopted a more multidisciplinary approach that makes better use of the wide range of expertise and skills at the federal reserve – in economics, financial markets, payments systems, and other specialties, as well as bank supervision. we will be doing more cross - firm comparisons to better understand differences in the practices of different firms and the risks they face, and we will be complementing on - site examinations with off - site, quantitative analyses by experts in a range of disciplines. as we improve our supervision, we will be sure not to lose sight of the diversity of our banking system. banks of all sizes, including regional and community banks, make critical contributions to our economy ; thus, we must continue our efforts to ensure the stability and vitality of smaller banks as well as larger ones. as we ’ ve been working to make our supervision more effective, we have also been taking care to ensure we do not inadvertently impede sound lending. businesses need access to credit to maintain or expand their payrolls and make productive investments. banks need to continue to lend to creditworthy borrowers to earn a profit and remain strong. if bankers become overly conservative in response to past lending mistakes – or if examiners force such

were a legacy of carry trade and capital inflows amounted to around 40 % of gdp, and where a large fiscal deficit that had to be financed in the domestic market had developed. the capital controls therefore gave monetary policy more scope to help stabilise and turn around the real economy once inflation came down. subsequently, they shielded the eocnomy from the financial spillover effects of the crisis in the eurozone. bis central bankers ’ speeches but the problem is that they are still in place, over five years after the climax of iceland´s financial crisis. the reason is that iceland is still facing a balance of payments crisis that is a legacy of former capital inflows and the unwinding of these big cross - border banks. there are three elements to this, as is described in this slide : contractual foreign debt payments in the next few years, well in excess of reasonable expectations of the size of the current account surplus ; offshore kronur, a legacy of the carry trade, which still amount to 20 % of gdp ; and potential krona payments, from the old banks to foreign residents, amounting to another 25 % of gdp. we can see from the icelandic case, and indeed many others, that although financial integration can offer many benefits to small, open economies, it also potentially entails significant risks that can turn into a nightmare if left unchecked. in iceland ’ s case, it was a pretty dramatic. what are the lessons, then? in the interest of time, i will briefly mention a select few. the first issue that i would like to mention is the need to monitor closely both net capital flows that immediately affect the economy – especially credit growth, asset prices, and domestic demand – and the developments of gross external assets and liabilities that might not affect the economy until risks materialise and banks are undergoing the transformation from being international in life to being national in death. during the financial crisis, there have been numerous cases of vulnerabilities in gross positions coming home to roost, such as the dollar - denominated parts of european banks ’ balance sheets. in iceland and similar cases there is also a statistical issue here that needs to be acknowledged : the distinction between flows that actually entered or left the country at the time and those that were simply flowing offshore in both directions but were booked through the icelandic headquarters and thus recorded in the country ’ s bp and iip. the second lesson relates to the eu framework for cross - border banking,