environment had a lot more to do with this narrowing, along with sluggish loan demand. historically low interest rates have significantly reduced the yields banks earn on their assets, especially mortgages. banks built up their holdings of mortgages as market conditions generated such remarkable volumes of these loans, and as weak demand for commercial loans left a void in bank balance sheets and income. historically low rates on new mortgage loans, together with rapid prepayment of higher - rate mortgages, have sharply reduced yields on bank mortgage portfolios. the preliminary data for 2003 indicate that the effective yield on mortgage - backed securities, including adjustable - rate products, fell to 4. 22 percent ; by late in the year, yields had fallen to only about 3. 90 percent. along with this pressure on yields, banks have faced an interesting new pressure on funding costs. for much of the last two years, households have been inclined to keep their assets very liquid and flexible. interest rates have been low by historical terms, and didn't seem to provide much incentive for households to tie up their assets in time deposits. the stock market - at least through the spring of last year - was on a downward track and certainly not providing attractive returns. flexible bank deposits offered a comfortable compromise, providing positive returns, deposit insurance, and flexibility to redeploy funds if alternative investments became more attractive. in this setting, bankers have valued core deposits even more highly, and have paid up for them. in particular, they have favored nonmaturity deposits such as money market or savings accounts. smaller - denomination certificates of deposit, in contrast, have declined steadily over a period of some years. influenced by the low interest rate environment, banks reduced the rates on their nonmaturity deposits by far less than money market rates had fallen. the result has been tighter margins, but with an important potential side benefit. the success that bankers had in raising these nonmaturity deposits created opportunities to reclaim some of the market share that bank deposits had lost over the previous decade or two. money market and savings accounts, in particular, now fund 30 percent of bank assets. remarkably, despite these pressures, it now appears that bank margins recovered to some degree late in 2003. the improvement was only about six basis points, but appears to be significantly influenced by slower prepayments and the resulting increases in mortgage asset yields. there were a host of other forces at work, suggesting that the improvement in margins may or may not be sustainable. still, banks

also plays a role, and we have seen a recent wave of merger announcements among the largest bank holding companies. based on what i hear from community bankers, mergers and acquisitions among big institutions have historically created opportunities for community banks. i wouldn't be a bank regulator if i neglected to mention that bank capital ratios remain very strong. nearly 99 percent of banks in the united states are well - capitalized, which is a higher proportion than we have ever seen. some analysts have expressed concern that bankers would reduce their capital buffers in order to increase dividend payments, especially as the tax treatment of dividend income became more favorable to stockholders. but in spite of these changes in the tax code, the aggregate dividend payout ratio at commercial banks increased only modestly, from 76. 4 percent of income to 77. 4 percent of income. conclusion in conclusion, the u. s. banking industry is healthy, strong, profitable and well - positioned to play its proper role in supporting growth and prosperity in our economy. many of the factors that made 2003 such a remarkable year for the industry look like they will carry over into 2004 as well. new challenges will arise as we move ahead, of course, and perhaps some new opportunities as well. adapting to change is an important aspect of the banking business, and the industry's ability to respond well to changing circumstances was a key to last year's record - setting results. i believe we can look forward with confidence to continued strong performance from the banking industry.