Market liquidity returning: Treasury's Ryan

WASHINGTON (Reuters) - U.S. Treasury Assistant Secretary Anthony Ryan said on Monday there were signs that market liquidity was starting to return but it won't happen overnight and requires greater investor caution in future.

In prepared remarks to a liquidity conference in New York sponsored by the World Research Group, Ryan said benchmark spreads were narrowing and issues of asset-backed commercial paper was rising. A copy of his speech was released in Washington.

"This is certainly not an 'all-clear' signal, but perhaps the beginning of the transition to an improved state of liquidity," Ryan said, adding, "This process will take more time."

Ryan said that for confidence to be fully restored, investors will have to feel more reassured not only about their returns but also about the risks in making investments.

He said too many investors had grown overconfident before liquidity conditions turned sour last summer and effectively "vaporized," leaving market participants unprepared.

"Investors must appreciate risk -- in its myriad dimensions and seek to better identify, assess and manage it," Ryan said, adding that requires having the "humility" to recognize that no single assessment of risk is adequate to guide an investment.

He said it will take time for conditions of increased transparency and for heightened independent analysis to persuade investors that they can invest with confidence again.

"As the global capital markets continue through this transition, some revaluations will be gradual, while others may be more dramatic," Ryan said.

"As a result, we are likely to witness continued volatility," he added.

Ryan said the U.S. Treasury Department was working with other the group of Seven rich industrial countries and with the Financial Stability Forum to come up with solutions for settling global financial markets. The FSF was setup in 1999 by international treasuries, central banks and financial regulators to share information on market conditions.

One thing that he suggested will help is that the United States is working on a blueprint for an improved regulatory framework for the financial sector that will replace the current "fragmented" set of regulations that apply to different parts of the sector.

(Reporting by Glenn Somerville; Editing by Neil Stempleman)