early 1990s. the rate of bank failures has accelerated and appears likely to remain elevated for some time. while most banks remain sound, appropriately capitalized, and profitable, this can be difficult to remember in the midst of strained banking conditions and weekly bank failures. the coordinated efforts and initiatives of the federal reserve, the u. s. treasury department, and other government agencies have contributed to the progress we have achieved in stabilizing the financial markets and the banking system. i think it is important to note that most of these efforts were directed at the system as a whole and were made available to banks of all sizes. for example, in september 2008, when a prominent money market fund “ broke the buck ” ( that is, its net asset value fell below one dollar ), the treasury department initiated a temporary guarantee program to avert a run on other money market mutual funds. then, in response to bankers ’ concerns about the adverse impact that unlimited guarantees for money market funds would have on bank deposits, the treasury adjusted the guarantee to cover only balances in place on the date the guarantee was issued. that is, funds that were already in the money market mutual fund accounts were guaranteed so they would not run out, but no guarantee was offered for new investments that might cause runs out of depository institutions and into the funds. a few weeks later, the deposit insurance limit was temporarily increased to $ 250, 000, an increase that had long been sought by community banks. in addition, under the temporary liquidity guarantee program ( tlgp ), the federal deposit insurance corporation ( fdic ) made available unlimited insurance for demand deposits. later the program was modified to also cover interest on lawyers trust accounts ( ioltas ) and low - interest negotiable order of withdrawal ( now ) accounts. these initiatives proved tremendously beneficial to community banks and their small business customers during the crisis and have been instrumental in returning some measure of stability to deposit markets. other efforts to calm markets were also designed to directly assist banks of all sizes. for example, more than three - fourths of the companies that received funds from the troubled asset relief program ( tarp ) capital purchase program were, in fact, community banks. in addition, the debt guarantee program put in place by the fdic under the tlgp has also been available to community banks, helping to support market confidence. and the federal reserve ’ s discount window lending as well as the term auction facility, which offered discount window funding through

, suggesting that investors continue to have a favorable outlook for corporate credit quality. despite some recent turbulence, owing in part to geopolitical events, stock prices have logged robust gains over the past 3 - 1 / 2 years, and broad equity indices have now retraced most of the ground lost between 2000 and 2002. some of the improvement in the financial condition of businesses is due to substantial efficiency gains by firms. moreover, the resulting robust gains in labor productivity have been well ahead of compensation growth and have dramatically boosted corporate profits. indeed, profits as a share of sector product - in essence profit margins - jumped to more than 14 percent in the first quarter, the highest level in decades. the improvement in the financial conditions also reflects fundamental changes in firms ’ balance sheets. in particular, firms have boosted their liquidity by extending debt maturities, replacing shorter - term debt with longer - term debt ; at the same time, they have reduced total leverage. many firms retired debt using proceeds from equity offerings, asset sales, or mounting profits. as a result, from 2002 to 2004, nonfinancial corporate debt grew at an annual rate of about 2 percent, its slowest pace since the early 1990s. one of the most striking financial developments since 2001 has been the rapid increase in corporate holdings of cash and short - term securities. since the end of 2001, the ratio of cash holdings to assets i should note that i am expressing my own opinions, which are not necessarily those of my colleagues on the board of governors of the federal reserve or on the federal open market committee. nellie liang and steve sharpe, of the board ’ s staff, contributed to these remarks. has risen sharply ( see exhibit ). 2 this increase is even more pronounced when ( on a consolidated basis ) cash is measured relative to investment, defined as the sum of capital spending and research and development ( r & d ) spending during the preceding twelve months. the ratio of cash to investment has averaged about 60 percent during the past few decades. generally, it is higher in recession periods, consistent with a strong precautionary savings motive by firms that face costly external financing ( almeida, campello, and weisbach, 2004 ). and, in 2001, the ratio of cash to investment was already somewhat elevated. but the ratio then soared to more than 150 percent by year - end 2004, as investment fell far short of cash flow from operations and net financing. this juxtaposition is unusual when the economy is