implications for how large and complex banks should be supervised, as compared with community banks. notably, our supervision of large banks reflects the scope and complexity of their activities as well as their interactions with other firms and possible effects on financial markets, and incorporates systemic risk considerations that could arise from the failure of these banks. this circumstance requires regulators to make capital, liquidity, and risk - management standards more stringent for large banks than for community banks. these standards not only are being established internationally, but also are required for the largest institutions under the dodd - frank act. a critical part of this supervisory process is rigorous capital planning and stress testing to ensure that the largest institutions are capable of absorbing unforeseen shocks. the federal reserve, for example, requires the largest top - tier bank holding companies to submit annual capital plans and conduct rigorous stress tests as part of the comprehensive capital analysis and review exercise. 8 in recognition of their systemic importance, the largest firms also are required to plan for their own orderly resolution in the event that they should fail. because of their complexity and risk characteristics, these firms require intensive and continuous on - site supervision ; the federal reserve has dozens of full - time examiners on site at the largest banks to monitor their risk - management systems, strategies, and operations on an ongoing basis. in the years since the crisis began, our supervision of these firms has become arguably much more intensive, which i believe is perfectly appropriate given the effect that problems at the largest firms had on the financial system and the broader economy. you may be asking, what does this have to do with community banks? not very much – which is precisely my point. the community banking model is very different from that of the largest banks. community banks are local by their very nature. they have deep roots in their communities. their value proposition is that they are able and willing to take the time and effort to know and work with their customers in a way that may not be possible for a larger, more distant institution. this trait is particularly important when it comes to small business lending, where a local community bank may understand things about a prospective customer that cannot be captured in a more quantitative credit - scoring model that might be used by a larger institution. risks at community banks tend to arise from their lending activities, whether in the form of credit or interest rate risk, and a lack of diversification can exacerbate these risks. unlike large, complex banks, community banks typically do not rely on their investment

woods. but the darkest financial storm clouds have lifted a little since the fund meetings. the us congress finally approved more resources for the imf, the threat of a credit crunch extending to the industrial economies in the wake of ltcm receded, helped also by an easing of monetary policy in europe as well as in the united states. in asia, japan took more determined policy action to address the fragility of the banking system and to stimulate domestic demand ; the yen strengthened ; china and hong kong both remained admirably resolute ; and there have even been some encouraging signs of renewed capital inflows to some of the asian countries. the floating of the exchange rate in brazil last month inevitably increased concerns about emerging market instability, but it is encouraging that adverse effects on other markets have so far been limited. – 3 – there may be further particular setbacks, as far as the overall financial situation is concerned, but i think i can confidently say that if it doesn ’ t get any worse it is likely to get better. risk aversion is all very well for a time, but it doesn ’ t pay the rent! what we are now having to cope with are the economic consequences of the earlier financial disturbances. the inevitable counterpart of recession in much of the rest of the world is a sharp slowdown of net external demand – particularly for manufactures – in the industrial world. that has been reflected in growing weakness and falling business confidence in large parts of the manufacturing sector in both the united states and europe. the prospective growth in world economic activity has already roughly halved – from its trend rate of about 4 %. unless this fall in net external demand is offset by sustained domestic demand growth in the industrial countries – unless, in other words, the industrial economies collectively accommodate the necessary improvement in the external current account position of the emerging countries, through a deterioration in their own current account positions – the prospects for world economic activity would be dismal. happily, we start from a position of relatively low inflation throughout the industrial world and, faced with weakening external demand, we can afford to see higher offsetting domestic demand growth without jeopardising price stability. indeed we need to see higher domestic demand growth than we otherwise would if overall demand is not to fall short of underlying supply capacity, and we need it, too, to offset the effects of weak world prices and of lower exchange rates in many emerging market producers on our own domestic price level. these considerations largely explain the easing of