Substantial Financial Reforms Needed: NY Fed

WASHINGTON(Reuters) – It is critical for policy-makers to help the financialsystem adjust during a difficult time, but substantial regulatoryreforms are needed to make institutions and markets more resilient, atop Federal Reserve official said on Thursday.

Federal Reserve Bank of New York President Timothy Geithner said inprepared testimony to the House of Representatives Financial ServicesCommittee that the financial crisis of the past year has underscoredthe need to change an outdated patchwork of financial regulators.

"The critical imperative today is to help facilitate that adjustmentand to cushion its impact on the broader economy," Geithner said. "Theforces that made the system vulnerable to this crisis took a long timeto build up and the system will need some time to work through theiraftermath."

"I believe the most important imperative is to build a financialsystem that is more robust to very bad outcomes and more resilient toshocks," Geithner said.

Major institutions would have to become less vulnerable to shocks,and the system would need to be less vulnerable to pull-backs inliquidity and be able to withstand the failures of a major financialfirm.

The financial system needs better "shock absorbers," such asstronger capital reserves and risk management among institutions, andsimplifying and consolidating the regulatory architecture to reduceopportunities for regulatory "arbitrage," he said.

The use of government backstops such as central bank liquidity toolsand other emergency powers requires stronger oversight to limit the"moral hazard" that they create by encouraging riskier behavior amonginstitutions.

"To mitigate this effect on risk-taking, strong supervisoryauthority is required over the consolidated financial entities that arecritical to a well-functioning financial system," he said.

(Reporting by Patrick Rucker; Writing by David Lawder; Editing by Andrea Ricci)