we strive to improve the regulatory framework going forward. i want to emphasize that these principles, as in the case of many principles, are easier to state than to achieve. let me start by acknowledging there are aspects of the exacting standards we have sought to impose on our financial system that have turned out to be expensive in relation to the return against our public policy objective. and provisions that seem optimally designed at any given time are likely to need to evolve as conditions change. that this should occur is a natural aspect of a dynamic financial environment. there are areas where we are likely to have erred in being too prescriptive and others where we left too much room for discretion and judgment. it would be good if we could find a way to build into the initial design of guidance and regulation the capacity for quicker and continuous evolution as we learn more. second, we need to continue to adapt our approach to the imperatives of a much more integrated global financial system. global integration, of course, gives us all a greater stake in the quality of supervision outside our borders. this pragmatic interest will lead us to spend progressively more resources and attention on the international dimension of our work. this recognition informed the efforts that led to the basel capital accord, the lamfalussy standards for payment and settlement systems and many other international cooperative efforts. but the imperative is much stronger today because of the much greater extent of financial integration, and it is only likely to grow. it is also important that the design of regulatory initiatives in the united states be informed by a careful assessment of their relative impact on u. s. institutions and markets. effective solutions to many of the concerns we face in our national financial systems will require multilateral approaches. rather than starting with a presumption that we will act in the united states and then hope to induce the world to follow, there are some areas where the more effective approach will be to start with the borderless solution by which i mean one designed to apply to a class of institutions and financial instruments, independent of geography and currency. where this does not prove possible on terms or in a time frame we like, we of course preserve the option to move alone. third, we live in a financial system in which nonbank financial institutions play a much larger role than they did in the past, a system in which the differences between the activities of the bank - centered financial institutions and nonbanks has diminished, and in which the largest commercial banks and investment banks compete

timothy f geithner : principles to guide the future evolution of financial supervision and regulation 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 2006, new york, 19 may 2006. * * * thanks for inviting me to speak to you today. you are meeting at a time of significant confidence in the strength of the global economy and in the overall health of the financial system. on the available evidence, the core of the u. s. financial system is stronger than it has been in some time. capital levels are higher and earnings stronger and more diversified. this strength is the result of many factors. it is the result of the length and strength of the economic expansion in the united states and the associated improvements in credit fundamentals. it reflects increases in the scale and scope of the operations of the largest institutions. it is the result of the dramatic innovations in the technology of finance and in the opportunities that has created for managing risk more effectively. and it reflects the increased integration of national financial institutions and the resulting competitive pressure and opportunities for diversification. we have seen substantial improvements in risk management practice and in internal controls over the past decade. these improvements are the product of large investments in people and technology, as well as changes to the internal architecture around control and compliance. these investments were, of course, driven by a series of important changes in law and regulation, but they also reflect a rational response by the institutions themselves to the financial and reputational damage associated with some of the earlier weaknesses. the progress achieved in internal control regimes has of course come with some costs. many of these costs can be measured in dollars, but others, such as management attention and the uncertainty induced by greater vulnerability to enforcement action and litigation, are more difficult to measure. despite the difficulty of adding up all these costs, it is hard to challenge the widespread view that they have been quite substantial. but the relevant metric is not merely their magnitude, but how they compare to the magnitude of the resulting gains. there is no straightforward way to make this assessment, but today i want to offer some perspectives on our continued efforts to balance critical financial stability objectives with the need to foster and encourage the innovation and dynamism that is such a central part of the u. s. financial system. i ’ ll begin with the observation that profitability measures suggest that the business of financial intermediation is reasonably healthy, despite the