timothy f geithner : global economic and financial integration – some implications for central banking remarks by mr timothy f geithner, president and chief executive officer of the federal reserve bank of new york, at the columbia business school center on japanese economy and business'20th anniversary conference, columbia university, new york city, 26 october 2006. * * * thank you. this is a time of remarkable evolution in the world economy. the share of the world ’ s population exposed to the opportunities and pressures of economic and financial integration is higher now than ever before. while we almost certainly do not fully understand the precise implications of this process for long - run global growth and welfare, we know that the gains to global growth and welfare have the potential to be large and pervasive. to acknowledge this potential is to acknowledge the merits of investing substantial intellectual capital into strengthening our understanding of the policy challenges and implications of global economic and financial integration. compared to even a decade ago, world financial and product markets are significantly more integrated. trade is a substantially larger and rising share of gdp, and the share of goods and services that constitute the “ tradable ” sector is increasing. cross - border flows of real and financial capital have also increased dramatically - a reflection of the recent notable reduction in the degree of home bias in capital markets. along with the evolving pattern of cross - border flows, we ’ ve also seen profound increases in the absolute size of current account balances in both industrial economies and emerging market economies. the average absolute value of current account balances as a share of gdp is higher today than it was three decades ago, with much of the run - up occurring in the past decade, and there is less dispersion around the average. net external positions as a share of gdp have increased over time for both industrial and emerging market economies. a more integrated world economy brings with it the prospect of a more productive and competitive world economy. the increase in the ties between national financial systems, the greater sophistication of financial markets and financial market instruments allow risks to be shared more broadly and capital to flow to where the returns are expected to be the highest. over time, these forces can be expected to strengthen and stabilize economic growth. indeed, the recent spurt of integration has occurred during a sustained period of relatively strong global growth, relatively stable and low inflation, and, although less widespread, a reduction in the volatility of growth. these improvements in outcomes have surfaced amidst a number of other

a complement to resiliency and necessary to achieve stronger firms and a stronger system. as i know you are well aware, there has been renewed attention on the importance of effective corporate governance across the industry. the debate includes examining the merits of familiar structures and practices of corporate governance and increasingly has focused on the corporate cultures of financial institutions. in this regard, i ’ d offer that the themes we see across the industry are fairly common. that is, both recognition of the issues and progress in addressing outstanding challenges are resident in all types of institutions, whether banks, non - banks or market utilities. to start, i ’ ll bis central bankers ’ speeches touch on two elements in particular : risk culture and roles and responsibilities of boards of directors. in november of last year, the financial stability board ( fsb ) released a framework for assessing risk culture at financial firms. the fsb ’ s consultative document is set out as guidance for supervisory interaction with firms on risk culture. it effectively outlines the basic elements – the “ must haves ” or conditions necessary – for a firm to have a strong culture. it provides guidance for supervisors ( and, in turn, for firms ) in identifying practices and behaviors that can be indicators of a firm ’ s risk culture. and, for each area, the paper provides a set of indicators that can be used to assess where the firm is on the spectrum. to highlight those areas : • not surprisingly, “ tone from the top ” is the first indicator. • accountability – that is, ownership of risk, effective escalation, and consequences. • effective challenge – including transparency and open dialogue across and between the board and senior management and senior management and staff. • and, finally, incentives – both compensation and talent development / promotion processes. supervision in this area involves an assessment of the effectiveness of a financial institution ’ s governance, including the extent to which the board and senior management demonstrate effective behaviors that contribute to good governance. this includes consideration of the behavioral dynamics of the board and senior management, such as how the “ tone at the top ” and the cultural values of a bank are communicated and put into practice, how information flows to and from the board and senior management, and how potentially serious problems are identified and addressed throughout the organization. i think the fsb ’ s document sets out a good set of reference points for supervisors – and for firms – to explore in evaluating risk culture. as has been noted by others – and is emphasized in the fsb ’