gradual decline in the spread between average interest rates paid on loans and the cash rate. for example, the spread between the average mortgage rate paid and the cash rate declined from 275 basis points in 1996 to around 125 basis points in 2007 ( graph 8 ). graph 8 since the onset of the financial crisis, banks have increased the spread between lending rates and the cash rate for all loan types. the increases have varied across the different types of loans, partly reflecting differences in the reassessment of the riskiness of those loans and expectations regarding loss rates. but the primary factor driving the increase in the spread between lending rates and the cash rate has been the increase in the relative cost of funding that i have described above. financial institutions have increased their lending rates in the face of the increase in costs to maintain their net interest margins within the range observed in recent years. 2 in turn, this has been with the aim of maintaining profitability. without seeking to answer the question as to whether or not these movements in lending rates have been “ appropriate ”, the aim of my speech today, and the bank ’ s recently published analysis, has been to provide some facts to help in that discussion. as noted in deans and stewart ( 2012 ), there are a number of other factors which affect the reported net interest margin in addition to movements in lending rates and funding costs. and similarly, there are additional factors which affect the translation of net interest margins to profitability. bis central bankers ’ speeches

will review the asset purchase program regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices. in particular, we remain unwaveringly committed to price stability, and we are confident that we have the tools to be able to smoothly and effectively exit from the current highly accommodative policy stance at the appropriate time. our ability to pay interest on reserve balances held at the federal reserve banks will allow us to put upward pressure on short - term market interest rates and thus to tighten monetary policy when needed, even if bank reserves remain high. moreover, we have developed additional tools that will allow us to drain or immobilize bank reserves as needed to facilitate the smooth withdrawal of policy accommodation when conditions warrant. if necessary, we could also tighten policy by redeeming or selling securities. as i am appearing before the budget committee, it is worth emphasizing that the fed ’ s purchases of longer - term securities are not comparable to ordinary government spending. in executing these transactions, the federal reserve acquires financial assets, not goods and services ; thus, these purchases do not add to the government ’ s deficit or debt. ultimately, at the appropriate time, the federal reserve will normalize its balance sheet by selling these assets back into the market or by allowing them to run off. in the interim, the interest that the federal reserve earns from its securities holdings adds to the fed ’ s remittances to the treasury ; in 2009 and 2010, those remittances totaled about $ 125 billion. fiscal policy fiscal policymakers also face significant challenges. our nation ’ s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession. to a significant extent, this deterioration is the result of the effects of the weak economy on revenues and outlays, along with the actions that the administration and the congress took to ease the recession and steady financial markets. however, even after economic and financial conditions return to normal, the federal budget will remain on an unsustainable path, with the budget gap becoming increasingly large over time, unless the congress enacts significant changes in fiscal programs. for example, under plausible assumptions about how fiscal policies might evolve in the absence of major legislative changes, the congressional budget office ( cbo ) projects the deficit to fall from its current level of about 9 percent of gross domestic product ( gdp ) to 5 percent of gdp by 2015, but then to rise to about 6 1