of course, what is important here is not just that firms do a better job of capturing and valuing potential exposures, but that this information is translated into appropriately conservative judgments about limits and terms. where uncertainty and complexity is higher, we should see this translate into higher cushions against potential loss. and senior management needs to be willing to lean against the erosion in credit terms and margin practice typically induced by competitive pressure during periods of low credit losses and implied volatility. overall capital is, of course, an important part of what makes financial systems stable. but the size of the margin above the regulatory minimum or the thresholds that might affect a financial rating is critical, as is the extent to which the initial margin is set at levels that are likely to be sustainable over the cycle. the closer these cushions are to levels that reflect potential future exposure across a more adverse set of market conditions, the more resilient markets and institutions will be under conditions of stress, and the less likely the prospect that the behavior by institutions will amplify financial shocks. stress testing and scenario analysis is an important part of the process of calibrating this relationship between risk and capital and margin. the test of a sufficiently strong process is not simply the realism of the process used to measure potential losses, but the impact that it has on the decisions made by the institution on the size and type of exposures relative to earnings, capital and collateral or margin and the terms on which it extends credit. let me conclude by noting again that we are in a period of perceived strength in economic fundamentals in the united states and many countries around the world. this strength has helped to induce significant reductions in a range of market - based perceptions of risk. much of this confidence may prove warranted and durable, but the extent to which it endures will depend in part on the degree to which those running the major financial institutions in the united states use the opportunity presented by this period of relatively high profitability to strengthen their capacity to withstand a less favorable overall macroeconomic and financial environment. the balance between innovation and resilience that has characterized the u. s. financial system in recent years has played an important role in the improved performance of the u. s. economy. we all have a strong interest in preserving this balance. thank you.

sheet valuations were then corrected to fully assure the values of npls were accurate, at that point in time. over the last two years the joint supervisory teams ( jsts ) have continued to address these issues through ongoing supervisory engagement with firms. while we recognise that the workout of npls will take some time, a harmonised and transparent 3 / 6 bis central bankers'speeches supervisory approach is necessary. therefore in 2015 the high level group on npls was mandated by the supervisory board of the ecb to develop a consistent supervisory approach to dealing with this problem. * * * in september 2016 we published, for consultation, the draft guidance on npls, accompanied by a stocktake of national practices and legal frameworks related to npls. these measures are important milestones on the journey towards the sustainable reduction of npls across the euro area. the draft guidance sets out ecb banking supervision ’ s expectations on npl workout and resolution and is focussed on addressing the issues surrounding the stock of npls that has piled up in the balance sheets of a number of euro area banks. the structure of the guidance follows the life cycle of npl management. this begins with a strategy for the effective management and ultimate reduction of npl stocks in a clear, credible, and feasible manner for each relevant portfolio. the primary responsibility for the reduction of npls stands with the boards and management of banks. the guidance requests banks to implement clear npl strategies including operational plans. gaps in the strategies and deviations from the stated objectives can then be identified by supervisors who can also benchmark accordingly. core building blocks of a strategy should include an assessment of the operating environment, including internal npl capabilities, external conditions impacting npl workout, and capital implications. clear bank - defined targets for both the development of operational capabilities and projected npl reductions over the short, medium, and long - term time horizons must also be put in place. strategies should include any necessary changes in the organisational structure of the bank and be fully embedded in management. closely linked to the strategy is the governance structure and operational set - up – without which banks will not be able to address their npl issues in an efficient and sustainable way. key elements in the guidance relate to steering and decision - making, ensuring an effective npl operating model, internal control frameworks, and monitoring and early warning processes. the promotion of appropriate recognition and classification criteria and practices that are consistent across banks is an important goal for banking supervisors. adequate