past and the future? i see at least five broad topics that are worthy of our attention. first, the recession of 2001 and the unusually slow recovery over the past two years have clearly affected the banking and financial services industry. second, the passage of the gramm leach bliley act in late 1999 recognized many of the market realities i discussed with you in 1998 and provided increased opportunity for the formation of large financial conglomerates. third, accounting and corporate governance scandals, symbolized by enron and worldcom, and the resulting passage of the sarbanes - oxley act in july 2002, have not left the financial services industry untouched. fourth, although the dot - com craze has ended, technological change has continued, and its influence on the present and future of financial services is pervasive. finally, all these developments and others, such as the russian debt default in the fall of 1998, have accentuated the importance both of risk measurement and management at individual banks and of the need for supervisory policies and procedures to reflect and encourage modern risk management. the recession of 2001 turning first to the recent recession and our unusually slow recovery, i think that the most remarkable fact regarding the banking industry during this period is its resilience and retention of fundamental strength, even at those institutions whose earnings were negatively affected by the slowdown. beginning about the time i last spoke to you, the u. s. financial system suffered a sharp increase in corporate bond defaults, business failures, and investor losses. at commercial banks, troubled loans, including charge - offs, classified loans, and overdue credits, climbed. in sharp contrast to other periods of economic weakness and market volatility, however, during the most recent period the vast majority of commercial banks remained unusually healthy. strong rates of return on both equity and assets and healthy capital ratios were all maintained. perhaps most tellingly, the period from 1998 through 2002 averaged only five bank failures per year. today, market measures of bank risk derived from stock prices, subordinated debt spreads, and credit default swap spreads all signal a healthy banking industry. in contrast, in the last three years of the 1980s, more than 200 banks failed on average each year ( not to mention a larger number of savings and loans ). even in 1993, two years after the 1990 - 91 recession ended, slightly more than 100 banks failed. to what can we attribute the recent outstanding performance, and will it be repeated in future economic slowdowns? in

the economy recovers, long - term rates will rise over time to more normal levels. a return to more normal conditions in financial markets would, of course, be most welcome. many commentators have noted, however, that both an extended period of low rates and the transition back toward normal levels may pose risks to financial stability. in the final portion of my remarks, i will discuss some aspects of how the federal reserve is approaching these risks. why are long - term interest rates so low? so, why are long - term interest rates currently so low? to help answer this question, it is useful to decompose longer - term yields into three components : one reflecting expected inflation over the term of the security ; another capturing the expected path of short - term real, or inflation - adjusted, interest rates ; and a residual component known as the term premium. of course, none of these three components is observed directly, but there are standard ways of estimating them. chart 2 displays one version of this decomposition of the 10 - year u. s. bis central bankers ’ speeches treasury yield based on a term structure model developed by federal reserve staff. 1 the broad features i will emphasize are similar to those found by other authors using a variety of methods. 2 all three components of the 10 - year yield have declined since 2007. the decomposition attributes much of the decline in the yield since 2010 to a sharp fall in the term premium, but the expected short - term real rate component also moved down significantly. let ’ s consider each component more closely. the expected inflation component has drifted gradually downward for many years and has become quite stable. in large part, the downward trend and stabilization of expected inflation in the united states are products of the increasing credibility of the federal reserve ’ s commitment to price stability. in january 2012, the federal open market committee ( fomc ) underscored this commitment by issuing a statement – since reaffirmed at its january 2013 meeting – on its longer - run goals and policy strategy, which included a longer - run inflation target of 2 percent. 3 the anchoring of long - term inflation expectations near 2 percent has been a key factor influencing long - term interest rates over recent years. it almost certainly helped mitigate the strong disinflationary pressures immediately following the crisis. while i have not shown expected inflation for other advanced economies, the pictures would be very similar – again, except for japan. with the expected inflation component of the 10 - year rate near