Greenspan Urges Regulatory Shift from Capital to Risk Management

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CHICAGO -- Capital may no longer be king at the Federal Reserve Board.

Fed Chairman Alan Greenspan said Thursday that bank supervisors should be paying more attention to risk management systems at individual banks and less attention to their capital positions.

"At least part of the solution to the increasing complexity in bank risk positions may be to rely less on the writing of rules - such as capital regulations - that apply generally to all banks, and to concentrate more on the development of supervisory procedures that can accurately distinguish risks on a bank-by-bank basis," Mr. Greenspan said.

Increasingly, he added, the "basic unit of evaluation" in bank supervision should be the "evaluation and stress-testing of the bank's overall risk position, along with evaluation of the current value of individual bank assets."

Customized Supervision

Mr. Greenspan's remarks echo the message Comptroller of the Currency Eugene A. Ludwig has been putting out for the last few months.

Joining Mr. Greenspan at the Federal Reserve Bank of Chicago's bank structure conference Thursday, Mr. Ludwig reiterated his belief that supervision of the largest banks must be customized.

"For each of our largest banks, we now develop an individual risk profile based on all the risks the bank takes on," he said. "We then try to determine whether the risks are appropriate for the individual institution, given its resources, and whether the controls the institution has in place are appropriate to the risks."

The Fed conference, which convened Thursday and ends today, is focused on the oft-mentioned lament that the banking industry is in decline.

When considered in the narrowest context, this sentiment may be true, Mr. Greenspan said. But, he added, "it is far from clear that banking considered in its widest context really is a declining industry."

Mr. Greenspan said pursuing this new supervisory strategy will help regulators ensure that they "both continue to maintain a safe and sound banking system and do not result in banking becoming a truly declining industry," the Fed chairman said. …