of concern has been shrinking net interest margins. as liability costs rose rapidly last year, nearly all of the largest bank holding companies experienced margin declines, with about one - fourth experiencing a narrowing of 25 basis points or more since a year ago. however, the aggregate net interest margin of community banks was essentially unchanged last year. the more - favorable margin trends at community banks are probably linked to their proportionally higher funding of assets with core deposits, which are less sensitive to rising rates. moreover, in 2000 the average rate paid on both large and small time deposits by small banks declined relative to that paid by larger banks. despite pressures on funding, community banks have been relatively successful at maintaining their core deposit bases. for example, a decade ago banks with less than $ 50 million in assets funded around 80 percent of their assets with core deposits. over the course of the past decade, that figure declined 7 percentage points, but core deposits remain a fairly high, 73 percent of assets. for banks with more than $ 10 billion in assets, core deposit holdings are only 39 percent. community banks have experienced only moderate diminishment in the share of core deposits funding assets, but when that trend is coupled with rapid loan growth, pressures on bank liquidity appear to have intensified. community banks have funded the gap between loan and deposit growth largely by liquidating investments. for example, from 1990 to the end of last year, smaller community banks increased the share of loans on their balance sheet 8 percentage points, to 59 percent. over the same period, liquid funds and investments fell 8 percentage points, to 38 percent of assets. the combined deposit and loan trends have pushed liquidity benchmark ratios, such as loans to deposits, to historic peaks. however, there are some signs of relief for bank liquidity. for one, the demand for loans by businesses and consumers appears to be moderating, and there are some early indications that consumers are returning to bank retail deposits in the wake of disappointing stock and mutual fund results. still, many of these liquidity pressures are likely to remain in one form or another, and banks will almost certainly continue to explore nondeposit liabilities to fund asset expansion. while this is not new to community banks, the growing volume, variety, and complexity of non - deposit funds creates new issues. to meet this challenge, community banks must strive to fully comprehend the implication of relying on these types of funds from both liquidity and earnings perspectives. it is, of course,

that they are well along in their own preparations worldwide and many of them are pushing their numerous local suppliers to be prepared to maintain the flow of materials and services. that is a significant positive step. the recent conversion to the euro was very smooth, thus proving that a job similar to the one we have at hand can be successfully accomplished. but that intense focus in europe, along with other world financial troubles, has obviously been deflecting all too much attention away from y2k issues. i worry that time will simply run out for some activities in some countries, particularly in the developing economies, and as a result risks exist for some level of disruption in various locales around the world. all of this has been affecting our economy in a variety of ways. on the positive side an important element in some y2k programs is the accelerated replacement of aging computer systems with modern, state - of - the - art hardware and software. such capital expenditures should raise the level of productivity in those enterprises, and addressing y2k has increased the awareness of many senior executives of the complexity and importance of carefully managing their corporate information technology resources. the increased replacement demand also has contributed to the spectacular recent growth in this country ’ s computer hardware and software industries. a reverse effect, which i believe will shortly become visible, is that many institutions will ‘ freeze ’ their remediated and tested systems for the remainder of this year, effectively foregoing the installation of major new hardware and software systems. this moves some spending on technology forward from 1999 into 2000. so, ultimately, we are largely shifting the timing of these investment expenditures, rather than changing their total amounts very much. another area in which uncertainty about y2k readiness is likely to have noticeable effects in 1999 is in the management of inventories. as the millennium approaches, i expect businesses will want to hold larger inventories of goods as insurance against y2k - related supply disruptions. such a shift from ‘ just - in - time ’ inventory management to a ‘ just - in - case ’ posture is likely to prompt an increase in orders and production during late 1999, with these stocks subsequently being run off in the first half of 2000. we at the fed, for example, will do precisely that in our management of the production of new currency. while year 2000 preparation efforts may give a temporary boost to economic activity in some sectors, the probable net effect on the aggregate economy is slightly negative. other than the obviously very valuable ability to maintain operations