. ( this may partly be a payback for the mild winter, which brought forward some spending. ) employment growth remains positive, but has slowed considerably of late as the economy has lost forward momentum, and the unemployment rate remains elevated. the headwinds retarding recovery are well known. many consumers have been deleveraging in response to the large losses in wealth generated mainly by the collapse in home prices. the supply of credit – particularly mortgage credit – to many families remains constrained, limiting the degree to which many households can fully benefit from low interest rates. although there have been some positive signs in the housing market recently, housing activity nevertheless remains at very low levels. the sector has been restrained by several factors including the large shadow inventory making its way through the foreclosure pipeline, tight underwriting standards for new mortgage origination, and the sharp slowdown in household formation. although the corporate sector as a whole is now relatively healthy, there still is a significant constraint on the availability of credit to small business. business investment continues to expand, but at a restrained pace. i presume that this partially reflects uncertainty over the economic outlook, including the risks around the evolution of u. s. fiscal policy and the crisis in europe. fiscal policy has already become restrictive as state and local governments have cut expenditures in response to revenue shortfalls. moreover, we face the so - called “ fiscal cliff ” at the start of next year. at the beginning of 2013, federal fiscal policy is scheduled under current law to become sharply contractionary, with abrupt increases in taxes and cuts in spending. businesspeople tell me that the uncertainty about how congress and the administration will deal with the fiscal cliff – and our fiscal challenges more broadly – is already inhibiting hiring and investment. the fiscal cliff represents a threat to the recovery that is wholly avoidable. but we will only avoid it if our politicians act responsibly. we need a credible strategy for bringing down the federal budget deficit over time in a manner supportive of ongoing economic recovery. any plan should start slowly, but build steadily over time. it should be bipartisan in nature so that the plan is viewed as sustainable across the political cycle. bis central bankers ’ speeches meanwhile the crisis in the eurozone has resulted in a sharp slow - down in economic growth in europe and tighter financial conditions globally. it has hurt u. s. consumer and business confidence and is already a material drag on u. s. growth. economic momentum in many other

requirement, a bank should already be operating above that level, which should dampen the effects of a sudden downturn in business conditions and asset quality. along those lines, the committee recently agreed that banks adopting the " internal ratings based " approach to credit risk will be required under pillar 2 to conduct meaningfully conservative credit risk stress testing. stress testing should help banks to maintain adequate capital buffers in advance of potential downturns in the economy. the treatment of operational risk beyond those two broad concerns expressed about the potential for complexity and procyclicality, some respondents have called for changes to more specific capital charges in the proposals. one of the most interesting discussions centers on whether – or how – the new accord should treat a bank ’ s exposure to potential losses that result from inadequate or failed internal processes and systems, or from external events. the endeavor to manage operational risk, as this group of risks has become known, has sparked significant research in the industry and beyond. supervisors, like more and more banks, have adopted a view of operational risk management as a comprehensive practice comparable to the management of market or credit risk. while operational risk cannot be quantified with the same degree of precision as market or credit risk, the committee believes that introducing a separate charge for exposures to operational risk will bolster efforts to find better ways to address it. failing to include an operational risk charge in the new minimum requirements could inadvertently derail the ongoing work to identify and manage this exposure. although we ’ ve seen encouraging progress in measuring operational risk – within both individual firms and industry working groups – the committee recognizes that the industry has not settled on particular methodologies or principles. accordingly, the new accord will permit an unprecedented amount of flexibility to accommodate a spectrum of approaches to operational risk. for the most sophisticated institutions, the " advanced measurement approach " – or " ama " – is really the ultimate expression of the goal of drawing on internal measures. in response to concerns that the proposed " floor " on the ama stifled innovation, the committee decided recently to eliminate it. consequently, banks will be free to experiment with a great variety of methodologies, without undue constraint on their value to the firm. the ama is meant to be a catalyst for innovation. calibration of other particular charges and the overall level of capital of course, a good portion of the consultations have addressed rules and formulae used to determine capital charges for other categories of exposures and transactions. the committee and its working groups have