Timothy F Geithner: Perspectives on the US financial system Remarks by Mr Timothy F Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, before the Economic Club of New York, New York, 27 May 2004. *  *  *  It is a pleasure to join you today at the Economic Club of New York. And it’s a pleasure to share the program with John Thain. Today I want to talk about the U.S. financial system at this point of transition in the U.S. economy. The U.S. financial system is currently enjoying a period of considerable strength. Financial institutions are strong. Financial innovation has spurred advances in risk management. Market practices surrounding key products such as OTC derivatives have been strengthened. And the industry’s payments infrastructure has been improved by additional safeguards and new clearing and settlement arrangements. The system has been remarkably resilient in the face of a range of recent challenges. The recent record is reassuring, but no financial system is without vulnerability. Periods of relatively favorable economic and financial conditions, such as we are experiencing today, are good times to reflect on the capacity of the system to withstand future stress. I want to focus today not only on developments that have improved the overall stability of the system, but also on some continuing challenges, and on the implications of these for risk management and supervision. The history of shocks to the U.S. financial system is highly varied.
For the Federal Reserve, this means that we will devote even greater attention to the institutions that now constitute the center of our financial system, as well as to the clearance and settlement backbone. It means we need to make a greater investment in looking at risks in the financial system as a whole, not just those that have their origin in banks. And it means that we will have to continue to intensify our cooperation with other supervisory and regulatory authorities. The U.S. financial system is of course only as strong as our economy as a whole. Overall, the fundamentals of the U.S. economy look quite strong. But the size of our fiscal deficit, and the risks posed by our large external imbalance, place a greater burden than would otherwise be the case on the credibility of U.S. monetary policy. In this context, it is particularly important that we preserve the high degree of confidence that now seems to exist that U.S. monetary policy will respond appropriately to the evolving balance of risks in the overall economic outlook, and particularly that we will maintain price stability. This is critically important to sustaining the current expansion, and to sustaining confidence in U.S. financial markets over time. And getting monetary policy right is one of the most important things we can to do contribute to financial stability as well. BIS Review 33/2004  5