U.S. Treasury Under Secretary Robert Steel said the current de-leveraging in the financial sector and re-pricing of risk will continue for some time and that financial conditions will improve, though "not in a straight line."

Speaking at a keynote address to the Managed Funds Association in Chicago on Monday, Steel said he is optimistic that conditions will continue to improve, but noted there are still a number of challenges facing the economy.

"Capital markets continue to challenge financial institutions, as de-leveraging and re-pricing of risk continues," he said. "We recognize that this process will take additional time. I am confident that in the long term, our markets, financial institutions and regulatory practices will all help to make our capital markets stronger, enabling them to contribute to sustainable economic growth."



Steel said officials within the U.S. Treasury expect the process of raising new capital to continue, and that the economy will continue to see more spin-off effects from the $71 billion in rebate checks already sent out to U.S. residents.

"As Americans continue to spend their stimulus checks we have already seen an impact, as reported earlier this month retail sales have increased notably," he said.

On regulation, Steel said, "We believe today's marketplace needs a more effective and efficient regulatory structure."

He said the optimal model recommends three regulators: a regulator focused on market stability across the entire financial sector, one on the safety and soundness of those institutions supported by a federal guarantee, and a regulator focused on protecting consumers and investors.

"it is important to recognize that regulation alone cannot protect us from market challenges," he added.

By Stephen Huebl and edited by Sarah Sussman