Statement to the Congress - Federal Reserve Board's position on Financial Services Competitiveness Act of 1995

Federal Reserve Bulletin, August, 1995 by Alan Greenspan

Statement by Alan Greenspan, Chairman, Board Govemors of the Federal Reserve System, before the Subcommittee on Telecommunications and Finance and the Subcommittee on Commerce, Trade, and Hazardous Materials of the Committee on Commerce, US. House of Representatives, June 6, 1995

I am pleased to be here today to present the views of the Board of Governors of the Federal Reserve System on expanding permissible affiliations between banks and other financial services providers. The bill before the subcommittees, the Financial Services Competitiveness Act of 1995, H.R.1062, would authorize the affiliation of banks and securities firms as well as permit banks to have affiliates engaged in most other financial activities.

This bill would reform outdated statutory prohibitions established for a financial system that no longer exists, continuing the modernization of our financial system begun with last year's passage of the landmark interstate banking legislation. It provides the Congress with the opportunity to make the financial system more competitive and more responsive to consumer needs, all within a framework that would maintain the safety and soundness of insured depository institutions and permit both banks and securities firms to operate more efficiently. The Board believes that modern global financial markets call for permitting financial organizations to operate over a wider range of activities. Distinctions among financial products and institutions have become increasingly difficult to make, undermining the statutory and regulatory structures established more than three generations ago. The approach contained in the bill before you would be a major step, providing realistic reform and facilitating a wider range of activities for both securities firms and banking institutions, and it thus has the strong support of the Board of Governors of the Federal Reserve System.

There is, I think, general agreement on the forces shaping our evolving financial system - forces that require that we modernize our statutory framework for financial institutions and markets. The most profound is, of course, technology: the rapid growth of computers and telecommunications. Their spread has lowered the cost and broadened the scope of financial services, making possible new products that would have been inconceivable a short time ago and, in the process, challenging the institutional and market boundaries that in an earlier day seemed so well defined. The business of financial intermediation has always been the measurement, acceptance, and management of risk. In the past, commercial and investment banks performed these basic functions with quite different tools and strategies. Today, the tools and strategies increasingly overlap, blurring traditional distinctions between commercial and investment banks.

Examples abound. Securities firms have for some time offered checking-like accounts linked to mutual funds, and their affiliates routinely extend significant credit directly to business. On the bank side, the economics of a typical bank loan syndication do not differ essentially from the economics of a best-efforts securities underwriting. Indeed, investment banks are themselves becoming increasingly important in the syndicated loan market. With regard to derivatives instruments, the expertise required to manage prudently the writing of over-the-counter derivatives, a business dominated by banks, is similar to that required for using exchange-traded futures and options, instruments used extensively by both commercial and investment banks. The list could go on. It is sufficient to say that a strong case can be made that the evolution of financial technology alone has changed forever our ability to place commercial and investment banking into neat, separate boxes.

Technological innovation has accelerated the second major trend - financial globalization - that has been in process for at least three decades. Both developments have expanded cross-border asset holdings, trading, and credit flows, and, in response, both securities firms and US. and foreign banks have increased their cross-border operations. Foreign offices of US. banking organizations have for some time been permitted, within limits, to meet the competitive pressures of die local markets in which they operate by conducting activities not permitted to them at home. In the evolving international environment, these offshore activities have included global securities underwriting and dealing, through subsidiaries, an activity in which US. banking organizations have been among the world leaders, despite limitations on their authority to distribute securities in the United States. Similarly, foreign offices of securities firms have engaged in banking abroad.

Such a response to competition abroad is an example of the third major trend reshaping financial markets - market innovation - which has been as much a reaction to technological change and globalization as an independent factor. These developments make it virtually impossible to maintain some of the rules and regulations established for a different economic environment. As a result, there is broad agreement that statutes governing the activities of banking organizations increasingly form an inconsistent patchwork.