NEW YORK (Dow Jones/AP) -- The recent crisis in financial markets has left world economies in a gradual recovery from the effects of rapid asset price growth and unsustainably low risk premiums, a Federal Reserve official said Monday.
''This process will take time,'' Timothy Geithner, president of the Federal Reserve Bank of New York, said in remarks to be delivered Tuesday at an Economic Club of New York luncheon.
Geithner said banks around the world are working to strengthen the surprising weaknesses of a financial system still recovering from a year of turmoil.
He pointed out the Fed's ''first and most immediate priority remains to help the economy and the financial system get through this crisis.''
The central banker described the mild retracement of risk premiums in the credit markets -- including the fees on lending between financial institutions -- as ''modest and tentative.''
Geithner said that the market crisis had exposed ''very significant problems in the financial systems of the United States and other major economies,'' and swift action is needed to help regulation adapt to these ''vulnerabilities.''
Urgent action for regulatory policy should focus on the broader oversight of market practices and infrastructure, beyond the prudential supervision of key institutions, Geithner said. It should be harder for firms with little capital and little oversight to underwrite mortgages, for instance, and firms marketing complex securities should investigate their incentives, he added.
Geithner said firms' ''shock absorbers'' also need an overhaul, and promised that once they had emerged from this crisis, ''we will put in place more exacting expectations on capital, liquidity and risk management for the largest institutions that play a central role in intermediation and market functioning.''
Consistent with the renewed focus on improving market function, Geithner said 17 firms that account for 90 percent of derivatives trade will meet Monday afternoon to hammer out ''a comprehensive set of changes to the derivatives infrastructure.''
Geithner also stressed the need to watch the amount of unfunded borrowing and risk-taking beyond the regulated banking community.