FEDERAL Reserve Bank of New York President Timothy Geithner has called for greater central bank authority over banks so the financial system can better withstand shocks and recover from the credit crisis.

In addition, the Fed's lending programs to commercial and investment banks will remain "until conditions in money and credit markets have improved substantially," Geithner wrote in an opinion piece for the Financial Times. His remarks were excerpted and adapted from a speech due for delivery in New York, Bloomberg News reported.

Officials are searching for ways to prevent a repeat of the decline in credit, sparked by the subprime-mortgage bust, that has cost banks US$389 billion in writedowns worldwide and led the Fed to rescue Bear Stearns Cos from bankruptcy in March. Geithner's comments build on congressional testimony he gave in April.

"It is important that we move quickly to adapt the regulatory system to address the vulnerabilities exposed by this financial crisis," he said. Officials must be careful not to write rules that "make things worse" and "distort incentives in ways that may make the system less safe." Geithner also cited a March plan by Treasury Secretary Henry Paulson as providing a "sweeping consolidation and realignment of responsibilities."

The 46-year-old former Treasury undersecretary was scheduled to speak to the Economic Club of New York this morning (Beijing time). He didn't comment on the outlook for interest rates or the United States economy in the article.

The remarks contrast with a speech last week from Richmond Fed President Jeffrey Lacker, who warned that lending to securities firms raises the risk of future tumult.

Separately, Charles Plosser, head of the Philadelphia Fed bank, said last week that the Fed should set rules for providing emergency funding to financial institutions.

Loan initiatives

Geithner said in the Financial Times that "at present the Fed has broad responsibility for financial stability not matched by direct authority and the consequences of the actions we have taken in this crisis make it more important that we close that gap."

The Fed created the Term Auction Facility in December, which now offers US$75 billion in loans to commercial banks in biweekly sales. In March, the central bank started the Term Securities Lending Facility, run by the New York Fed, to auction as much as US$200 billion of Treasuries to the 20 primary dealers who trade with the Fed.

Then, also in March, as Geithner and the Fed moved to rescue Bear Stearns and engineer its sale to JPMorgan Chase & Co, the central bank established the Primary Dealer Credit Facility to lend to investment banks at the same discount rate charged to commercial banks. The rate is now 2.25 percent.

"We are examining what framework of facilities will be appropriate in the future, with what conditions for access and what oversight requirements to mitigate moral hazard risk," Geithner said. "Some of these could become a permanent part of our instruments. Some might be best reserved for the type of acute market illiquidity experienced in this crisis."

Donald Kohn, vice chairman of the Fed board in Washington, explored the same theme in a speech last month.