on their own, and they are made more compelling by the challenges ahead facing the u. s and the world economy. the increased stability in macroeconomic outcomes that has characterized the last two decades, the relative ease with which the u. s. financial system weathered the stress of the equity market shock and september 11, the increased mobility of the world ’ s savings and the optimism produced by the acceleration in productivity growth, have all worked to lower expected future volatility and risk premia. the reduction in credit losses and in realized volatility has created room for institutions to take greater risk without showing deteriorating risk - based capital measures. but the macroeconomic environment may not prove to be as benign in the future as it has in the recent past. and it is important that the major financial institutions in particular sustain a strong capital cushion at levels that will enable them individually and the u. s. financial system as a whole to manage safely in a more uncertain and perhaps more volatile world. thank you.

timothy f geithner : overview of the us financial system remarks by mr timothy f geithner, president and chief executive officer of the federal reserve bank of new york, at the bond market association ’ s annual meeting, new york, 20 april 2005. * * * thanks for giving me the opportunity to join you today. the u. s. and the world economy now confront the conjunction of several different transitions, which will have important implications for the u. s. financial system. among the most important of these transitions are : - the approaching demographic pressures on fiscal resources, which will hit most major economies at a time when underlying fiscal positions are still likely to be in substantial deficit. - the disposition of the global imbalances reflected most conspicuously in the u. s. current account deficit. - the inevitable evolution in the exchange rate regimes of those countries that have been actively targeting their nominal exchange rate against the dollar to a system where there is more variability in their bilateral and real effective exchange rates. - the transition from a long period of exceptionally low short - term nominal and real interest rates to levels more appropriate to the present circumstances. the slope and shape of this path toward equilibrium is necessarily subject to considerable uncertainty, and will depend on how the outlook unfolds. these are all types of disequilibria. they can be sustained for a time, but not indefinitely. the imbalances in our fiscal and external positions could be diffused gradually and smoothly. but the transitions to a more sustainable equilibrium could also bring greater volatility in asset prices, less stability in macroeconomic outcomes, slower growth and more uncertainty. the strength of the financial system is an important factor in assessing the probabilities associated with, and the potential impact of, the greater volatility that might be associated with these transitions. where financial systems are strong and resilient, they provide more of a cushion against shocks and help improve the effectiveness of monetary policy in those circumstances. where they are weaker, they can amplify the impact of shocks on macroeconomic activity and reduce the effectiveness of monetary policy in mitigating shocks. i believe the changes in the u. s. financial system over the past two decades have produced a stronger and more stable system. the large financial institutions at the core of the system have substantial capital cushions and larger and more diversified earnings capacity. these institutions maintain capital above both the regulatory minimums and their internal economic capital measures. the technology and practice of risk management