timothy f geithner : the changing face of risk management remarks by mr timothy f geithner, president and chief executive officer of the federal reserve bank of new york, before the institute of international bankers, new york, 9 june 2004 * * * it is a pleasure to join you today for this meeting of the institute of international bankers. the financial institutions you represent play a major role in our financial system. the iib has played an important part in shaping financial policy in the united states, by reminding us with force and persistence of the impact of our actions on the standards of fairness and equality of opportunity that we strive to maintain. the u. s. financial system has a number of features that help to make it attractive to participants from all around the world. the structure of our financial system is characterized by a diversity of channels for financial intermediation, with a relatively larger role for the capital markets and a smaller role for banks, than is true in most other major economies. and we have preserved, despite substantial consolidation, a system that comfortably accommodates the largest globally - active financial institutions side by side with a competitive and diverse array of regional and community banking organizations. we are very open to the presence of foreign financial institutions, and perhaps as important, have traditionally been very open to attracting non - u. s. financial talent to work in our markets. while the number of foreign banking organizations operating in the us has contracted over the last decade, the overall importance has grown. foreign banking organizations now account for 45 percent of total banking assets in the united states, up from around 40 percent a decade ago, and they account for a substantial share of total securities underwriting in this market. our framework for supervision and regulation is supportive of innovation. much of the most transforming innovations in finance started in our markets or were adopted more quickly and more broadly here than in many other financial systems. the u. s. system, relative to the model in many other countries, has involved a continuous, risk - focused process of supervision and a strong enforcement mechanism working alongside the supervisory community. in addition, we have traditionally assigned a more important role to market discipline, importantly through a strong disclosure regime, in reinforcing the supervisory regime, than has been the case in other markets. our system is successful in matching capital with ideas, in allocating savings to where returns are highest, in creating opportunities for households to better withstand the costs of change and dislocation that are inevitable offshoot of an open

and dynamic market economy, and in spreading risk to where it can be best absorbed. the high degree of competition and flexibility that characterize our approach helps drive the pace of innovation, both in new forms of financial instruments and in new ways to manage risks. no financial system, of course, is without vulnerability. and we face a number of important challenges in making sure our system is as strong as it can to be. but the substantial competition from a diverse set of financial institutions, including a strong presence by foreign financial institutions, is an integral part of what makes our financial system work well. our system would not be as efficient or as innovative, and our financial institutions would not be as strong, if we were less open or less committed to giving all institutions similar national treatment and equality of opportunity. i thought i would give you a brief overview of the some of the key challenges we face as supervisors and those that confront the risk management community. the fundamentals of the present u. s. expansion seem relatively strong, with confidence in its sustainability increasing. as the balance of risks to the outlook have evolved, and the financial markets have built in expectations of a move to less accommodative financial conditions, this is a good time to assess how well the u. s. financial system is positioned to deal with this transition, and to withstand the effects of future stress, if that were to materialize. from our perspective, the u. s. financial system is in reasonably strong shape. risk adjusted capital ratios are strong, and earnings have been robust. non - performing loan ratios are very low - at about one percent on average across the banking industry. the financial markets are pricing risk in exposure to financial institutions at what are still relatively low levels. securitization and the rapid growth in credit risk transfer instruments have enabled risk to be spread more broadly. risk management practices have improved in sophistication and rigor. firms have made substantial investments in improving the strength and resilience of their technology and systems infrastructure. payments and settlements systems have stronger safeguards in place. the overall capacity of the system to handle large hedging volume has increased substantially. despite the fact that we have experienced a sustained period of accommodative monetary and financial conditions, net credit growth to the private sector has been moderate. the overall financial position of the corporate sector is strong. new household borrowing has grown rapidly, but the broad measures of the ratio of debt service to income remain at a