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

isda ) has been working on this issue for the derivatives market and is expected to issue a consultative document soon that should prove instrumental in making further progress. the arrc has also been coordinating a similar effort across cash products of all types. the goal is to achieve consensus on a consistent approach across markets whenever feasible. looking ahead as i have noted previously, libor continues to have significant shortcomings despite strengthened governance in recent years, and uncertainty about its future will only grow over time. this uncertainty reflects the limited liquidity underlying libor and the corresponding legal risks i discussed earlier. but, i am also skeptical about whether libor can ever be adequately transaction - based. as andrew highlighted, there is no guarantee that libor will continue to exist beyond december 2021. in my view, libor is likely to go away — and it should, because it is not supported by a sufficiently robust regime. the libor countdown clock should provide an impetus for action, but it should also make market participants and regulators increasingly nervous as we approach the deadline — especially if longer - term solutions are not in train or in 4 / 6 bis central bankers'speeches place. time is of the essence, and we must manage it well. the arrc and others have laid out valuable transition plans, and we need to ensure that they are executed expeditiously and well. of course, i do not mean to minimize the costs involved. this is a monumental and complicated effort — one that the industry has never undertaken — and it will entail overcoming many obstacles. it requires collective action by a wide variety of market participants, some of whom may not be fully convinced of the need for change. and, there may be others with a direct interest in the preservation of libor — such as its administrator — who may not support moving away from the status quo. there also undoubtedly will be those who seek a free ride on the efforts of others. and, of course, the effort will encounter inertia and wishful thinking. all of this is to be expected in such a large undertaking with significant upfront costs. nevertheless, delay is not a viable option. this task is borne out of necessity. financial crises typically result when we fail to identify vulnerabilities, and then unexpected triggers turn those vulnerabilities into points of weakness that can lead to catastrophic failure. the discontinuation of libor, however, is different. we can see it coming, and we know the impact of