Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Banking and Financial Services, U.S. House of Representatives, February 11, 1999

Federal Reserve Bulletin, April, 1999 by Alan Greenspan

It is a pleasure to appear before the committee to present the views of the Federal Reserve on the need to enact legislation to modernize the U.S. financial system. The Federal Reserve continues to support strongly the enactment of such legislation and believes that H.R. 10 contains the fundamental principles that should be included in such legislation. I commend the committee for taking up this vital matter so promptly.

THE NEED FOR FINANCIAL REFORM

U.S. financial institutions are today among the most innovative and efficient providers of financial services in the world. They compete, however, in a marketplace that is undergoing major and fundamental change driven by a revolution in technology, by dramatic innovations in the capital markets, and by the globalization of the financial markets and the financial services industry.

For these reasons, we support, as we have for many years, major revisions, such as those included in H.R. 10, to the Glass-Steagall Act and the Bank Holding Company Act to remove the legislative barriers against the integration of banking, insurance, and securities activities. There is virtual unanimity among all concerned--private and public alike--that these barriers should be removed. The technologically driven proliferation of new financial products that enable risk unbundling have been increasingly combining the characteristics of banking, insurance, and securities products into single financial instruments. These changes, which are occurring all over the world, have also dramatically altered the way financial services providers operate and the way they deliver their products.

In the United States, our financial institutions have been required to take elaborate steps to develop and deliver new financial products and services in a manner that is consistent with our outdated laws. The costs of these efforts are becoming increasingly burdensome and serve no useful public purpose. Unless soon repealed, the archaic statutory barriers to efficiency could undermine the global dominance of American finance, as well as the continued competitiveness of our financial institutions and their ability to innovate and to provide the best and broadest possible services to U.S. consumers.

We believe that it is important that the rules for our financial services industry be set by the Congress rather than, as too often has been the case, by banking regulators dealing with our outdated laws. Only the Congress has the ability to fashion rules that are comprehensive and equitable to all participants and that guard the public interest.

The market will continue to force change whether or not the Congress acts. Without congressional action, changes will occur through exploitation of loopholes and marginal interpretations of the law that courts feel obliged to sanction. This type of response to market forces leads to inefficiencies and inconsistencies, expansion of the federal safety net, potentially increased risk exposure to the federal deposit insurance funds, and a system that will undermine the competitiveness and innovative edge of major segments of our financial services industry. Delay in acting on financial modernization legislation limits the Congress's options as these developments proliferate and complicate, increases the difficulty of enacting the safeguards included in H.R. 10 to protect safety and soundness and the public interest, and denies to consumers the benefits that immediate changes in our outdated banking laws will surely bring.

H.R. 10 also recognizes another dimension of the changing nature of banking and financial markets: that financial modernization means more than authorizing new powers and affiliations. Not only are we experiencing a revolution in financial products and their delivery, but the United States is also at a historic crossroads in financial services regulation. It is becoming increasingly evident that the dramatic advances in computer and telecommunications technologies of the past decade have so significantly altered the structure of domestic, indeed, global finance as to render our existing modes of supervision and regulation of financial institutions increasingly obsolescent.

The volume, sophistication, and rapidity of financial dealings will inevitably lead to supervisory emphasis on oversight of risk management of financial institutions and a marked scaling back of outmoded loan file and balance sheet surveillance. As we move into the twenty-first century, the remnants of nineteenth-century bank examination philosophies will fall by the wayside. Banks, of course, will still need to be supervised and regulated, in no small part because they are subject to the safety net. My point is, however, that the nature and extent of that effort need to become more consistent with market realities. Moreover, affiliation with banks need not--indeed, should not--create bank-like regulation of affiliates of banks.

This shift in supervisory mode, which is already under way, is market driven. It is not the result of some potentially reversible ideology. Such an approach is captured in H.R. 10 in many of the so-called "Fed-light" provisions, and we at the Fed strongly support this approach.