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

truth, our current good fortune stems from many factors, none of which can we count on recurring but several of which we can somewhat control. one factor is that the most recent recession was relatively short and weak, even though the recovery has been slow. that the federal reserve moved early and aggressively to lower interest rates has also been very helpful to banks and other participants in the u. s. economy. i suspect that many of you in this room have refinanced your mortgages, perhaps more than once, over the past two years. maybe some of you even cashed out, or extracted, some of the equity you had accumulated in your house when you refinanced your old loan. such mortgage - related activities have helped consumers to maintain their expenditures, have helped the overall economy to grow, and have contributed significantly to the earnings of the banking system. these earnings have helped banks absorb losses elsewhere in their portfolios and to maintain loan loss reserves. indeed, in the second quarter of this year, the fifty largest u. s. bank holding companies reported record earnings of more than $ 20 billion, and annualized rates of return on equity and assets were very impressive. another important factor is that the u. s. banking system entered the current period of stress well capitalized and with strong reserves. no doubt such balance sheets were due in very large part to the economic prosperity of the second half of the 1990s. but i believe that other forces were also at work. certainly bankers themselves learned many lessons from the banking and thrift crises of the late 1980s and early 1990s, including the importance of having strong capital and reserves and of avoiding obligor and industry concentration of credit risk. perhaps equally important were the banking reforms put in place in the aftermath of those crises. of the many reforms, i highlight the emphasis on strong capital positions provided by the federal deposit insurance corporation improvement act of 1991 and other changes in supervisory policy, such as the move toward risk - based capital standards embodied in the 1988 international capital agreement known as the basel accord. i hope that bankers and their supervisors will remember these lessons well into the future. i also point to another reason that the u. s. banking system has performed so well over the current economic cycle. this factor is the truly impressive improvement in methods of risk measurement and management and the growing adoption of these technologies by mostly large banks and other large financial intermediaries over the past five years. to be sure, at most banks the application of these