international agreement known as basel iii, which establishes minimum standards for internationally active banks around the world ; the united states, however, has gone even further to raise capital requirements for the largest firms. third, large firms are now required to show that they can continue to operate safely and serve their customers in stressful conditions similar to those that occurred during the crisis, an exercise known as stress testing. fourth, under the dodd - frank wall street reform and consumer protection act ( dodd - frank act ), congress authorized a new regime, known as “ resolution, ” to manage the failure of large firms in an orderly manner and reduce the chances that such a failure would threaten financial stability. the congress empowered the fed and the federal deposit insurance corporation ( fdic ) to require large firms to develop resolution plans. the fifth and final regulatory change i want to mention is that the dodd - frank act also gave the federal reserve more explicit responsibilities for safeguarding financial stability. as applied to large institutions, more stringent capital requirements and the other regulatory changes i have just described are intended to promote the stability of the financial system. in addition, to address the fragmentation of responsibility for financial stability across different agencies, the fed is part of a new interagency body, the financial stability oversight council, which helps u. s. regulators work together more effectively to better promote the stability of the financial system. enhanced supervision along with the additional tools provided by these regulatory changes, the federal reserve has fortified its supervision of large financial institutions. we significantly enhanced the manner by which we assess whether these firms have sufficient capital and liquidity and are meeting new regulatory requirements in this area. we have substantially raised our expectations for how well the firms we supervise should be managing their risks, maintaining internal controls, and exercising governance. and we have reorganized our supervision of large financial institutions to increase the quality, consistency, and range of perspectives brought to bear on supervisory strategy and decisionmaking. one of the most important enhancements to large bank supervision since the financial crisis is our assessment of whether large institutions are holding enough capital to deal with stressful financial conditions. the program includes stress testing and a yearly review of how firms are planning their future capital needs. 7 the latest results will be disclosed in the coming days. capital stress testing for banks is not new but the federal reserve has employed it much more extensively since the crisis. 8 using information on a bank ’ s finances and operations, these tests gauge how a firm ’ s capital position would be affected by

also be aided by changes over time in the policies of our trading partners. to some extent, it would seem appropriate for them to use their macroeconomic policies to stimulate domestic spending. in many cases, however, the root cause of deficient demand seems to be more structural than cyclical in nature, and would thus call for more micro - oriented measures. combined, these policy initiatives on the part of our trading partners should yield higher productivity growth, generate more vigorous spending abroad, raise rates of return on their capital investment, and ease their adjustment to smaller u. s. deficits. these changes, in turn, would boost the demand for u. s. exports and could shift portfolio preferences away from dollar - denominated assets. other public policies here and abroad can have an important influence on the transition process by working with markets and facilitating adjustment. for example, governments should strive to maintain and enhance the flexibility of markets. in particular, the united states and its trading partners should vigorously protect the current degree of market openness and should aim to reduce trade barriers further. over time, increased exchange rate flexibility abroad would also be beneficial. these and other types of market flexibility help facilitate needed shifts in spending and prices ; without them, rigidities might impede such stabilizing changes, causing adjustments to break out forcefully in other, more disruptive ways. strong financial institutions are especially important at this time when asset prices could move by large amounts unexpectedly. by ensuring that financial institutions are adequately capitalized and well prepared in general to deal with major changes in asset prices, prudential regulation decreases the risk that the actions of impaired financial institutions could disrupt the flow of credit and thereby intensify what might already be difficult adjustments. in addition, strong institutions should be positioned to weather any necessary changes in short - term interest rates as policy is adjusted. finally, there is the role that monetary policy plays in reacting to these imbalances and their inevitable unwinding. the federal reserve ’ s mandate is to keep inflation low and stable and to promote full resource utilization, with the economy expanding at its maximum sustainable rate. thus, anything that has the potential to threaten the stability of output and prices is of concern to us. these imbalances certainly affect the forces of supply and demand and have consequences for price stability. nevertheless, their direct influence on monetary policy is limited : they are important to us in so far as they affect the macro economy, and in this regard they are just a few of the