##ricing frequency of loans and investments against that of deposits and other funding sources. scenarios were created to determine the sensitivity of net interest income to varying interest rates and loan and deposit growth patterns. larger banks began to describe the volatility of their interest margins in the management's discussion and analysis ( md & a ) section of their annual and quarterly reports. by the start of the 1990s, bankers had new tools to manage balance - sheet risk. loans could be securitized so that term - loan volume that exceeded fixed - rate funding could be sold to investors who would bear the risk of rising interest rates. securitization also meant that banks were better able to manage the periodic swings in liquidity when loan demand grew beyond the flow of new deposits. of course, the movement of loans off the balance sheet into special purpose entities, as well as the creation of servicing rights and high - risk residual interests retained by banks, has resulted in a different set of risks. derivatives have become another tool for banks to manage risk exposures. a mismatch between the rate sensitivities of assets and those of liabilities creates the potential for unacceptably large swings in net interest income. banks can now use interest rate - based derivatives - - options, futures, forwards, and so on - - to mitigate their exposures by changing the timing of interest - rate effects on net interest income. interest - rate derivatives are also used to hedge fee income and expense streams, such as mortgage servicing rights. credit - risk management has evolved in a similar way. new tools supplement the credit judgments of individual lending officers making decisions within the criteria established by the credit policies of their organizations. today, scoring models help them quickly decide on applications for consumer and small business loans because the small size and large number of these types of credits make them particularly amenable to statistical modeling. since these models have not been in place throughout the course of a full credit cycle in the united states, they lack the validity that additional experience will bring. larger, more complicated credits still require individual credit analysis by loan officers, but tools have been developed to manage the resulting credit exposures. loan syndications help the lead bank to diversify risk by limiting the size of individual credits in the loan portfolio. credit derivatives and notes allow further mitigation of risk by transferring unwanted exposures to other market participants. thus, credit officers today can mitigate and diversify risk with new tools that go beyond the traditional

& p 500 firms would eventually need to make about $ 150 billion in contributions to close the remaining funding gap. and once the current funding hole is filled, these firms would still need to make contributions to cover their rising liabilities. indeed, db plans are increasingly concentrated in mature industries with aging workforces, for which the growth rate of liabilities is relatively high and rising. this longer - term challenge will remain even if the current favorable market conditions are sustained. conclusion in summary, recent indicators suggest that the pace of economic activity remains solid, while inflationary pressures continue to be subdued. in addition, the household and business sectors are, by and large, in good financial shape. although uncertainties remain, i believe the fundamentals are in place to generate sustainable economic growth.