U.S. Treasury Secretary Tim Geithner says there are signs that the financial crisis is easing, although it is not yet over.

In his opening remarks to the U.S. Senate Banking Committee on Wednesday, Geithner pointed out that corporate spreads have declined risk premiums have come down, firms are using less leverage and banks are funding themselves more conservatively, and securities issuance has revived. “These are all welcome signs. However, the process of financial recovery and repair will take time,” he stressed.

Along with its ongoing efforts at recovery, Geithner said, “As we work to stabilize the financial system, we need to make sure we are also putting in place comprehensive reforms to ensure a crisis like this never happens again.”

Geithner noted that regulatory gaps and vulnerabilities have been exposed by the ongoing financial crisis, and he pledged that changes are coming.

He noted that the rapid growth of the largest financial institutions and their increasing interconnections through securities markets have heightened systemic risk in the system. “In response, we need to expand our capacity to contain systemic risk,” he said. “This crisis – and the cases of firms like Bear Stearns, Lehman Brothers and AIG – has made clear that certain large, interconnected firms and markets need to be under a more consistent and more conservative regulatory regime. It is not enough to address the potential insolvency of individual institutions – we must also ensure the stability of the system itself.”

Additionally, while financial innovation has brought benefits, he said that policymakers “have to make sure that when households make choices to borrow, or to invest their savings, there are clear and fair rules of the road that prevent manipulation, deception, and abuse. Lax regulation has left too many households exposed to those risks.”

“We need meaningful disclosures that actual consumers and investors can understand. We need to promote simplicity, so that financial choices offered to consumers are clear, reasonable, and appropriate. Furthermore, there must be clear accountability for protecting consumers and investors alike,” he added.

The rapid growth of the financial sector also mean that the gaps and inconsistencies in the regulatory system have become more meaningful and problematic, he said. “Financial activity has tended to gravitate towards the parts of the system that are regulated least effectively. Looking ahead, our regulatory structure must assign clear authority, resources, and accountability for each of its key functions,” he suggested.

“Finally, the recent financial crisis has shown that the largest financial institutions can pose special risks to the financial system as a whole. In addition to regulating these institutions differently, we must give the Federal government new tools for dealing with situations where the solvency of these institutions is called into question,” he said, noting that Treasury has proposed legislation that would grant additional powers to avoid the disorderly liquidation of systemically significant financial institutions.

“Our central obligation is to ensure that the economy is able to recover as quickly as possible, and a prerequisite for that is a stable financial system that it is able to provide the credit necessary for economic recovery. Our work is not yet completed. But, even then, stability is not enough. We need a financial system that is not deepening or lengthening the recession, and once the conditions for recovery are in place, we need a financial system that is able to provide credit on the scale that a growing economy requires,” he concluded.

“Meeting this obligation requires early and aggressive action by the government to repair the financial system and promote the flow of credit. It requires governments to take risks. It also requires the financial system to support sustainable economic expansion. And it requires comprehensive regulatory reforms that deter fraud and abuse, protect American families when they buy a home or get a credit card, reward innovation and tie pay to job performance, and end past cycles of boom and bust.”

IE