Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Subcommittee on Capital Markets, Securities and Government-Sponsored Enterprises of the Committee on Banking and Financial Services, U.S. House of Representatives, March 19, 1997

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Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Subcommittee on Capital Markets, Securities and Government-Sponsored Enterprises of the Committee on Banking and Financial Services, US. House of Representatives, March 19, 1997

Thank you for inviting me to present the views of the Federal Reserve Board on the supervision of our nation's banking organizations should they be authorized by the Congress to engage in a wider range of activities. As you know, the Board has supported financial modernization for many years and hopes that the Congress will act,to facilitate reforms that, by enhancing competition within the financial services industry, would benefit the consumers of financial products in the United States.

Financial modernization may well mean that future banking organizations will be sufficiently different from today as to require perhaps substantial changes in the supervisory process for the entire organization. Just how much modification may be needed will depend on the kinds of reforms the Congress adopts. In evaluating those modifications, I would like to underline the significant supervisory role required by the Federal Reserve to carry out its central bank responsibilities. I also would like briefly to discuss the continued importance of umbrella supervision and the implications of a wider role for bank subsidiaries in the modernization process.

SUPERVISION AND CENTRAL BANKING

There are compelling reasons why the central bank of the United States--the Federal Reserve--should continue to be involved in the supervision of banks. The supervisory activities of the Federal Reserve, for example, have benefited from its economic stabilization responsibilities and its recognition that safety and soundness goals for banks must be evaluated jointly with its responsibilities for the stability and growth of the economy. The Board believes that these joint responsibilities make for better supervisory and monetary policies than would result from either a supervisor divorced from economic responsibilities or a macroeconomic policymaker with no practical experience in the review of individual bank operations.

To carry out its responsibilities, the Federal Reserve has been required to develop extensive, detailed knowledge of the intricacies of the U. S., and indeed the world, financial system. That expertise is the result of dealing constantly over many decades with changing financial markets and institutions and their relationships with each other and with the economy and from exercising supervisory responsibilities. It comes as well from ongoing interactions with central banks and financial institutions abroad. These international contacts are critical because today crises can spread more rapidly than in earlier times--in large part reflecting new technologies--and require a coordinated international response.

CRISIS MANAGEMENT AND SYSTEMIC RISK

Second only to its macrostability responsibilities is the central bank's responsibility to use its authority and expertise to forestall financial crises (including systemic disturbances in the banking system) and to manage such crises once they occur. In a crisis, the Federal Reserve, to be sure, could always flood the market with liquidity through open market operations and discount window loans; at times it has stood ready to do so, and it does not need supervisory and regulatory responsibilities to exercise that power. But while sometimes necessary in times of crises, such an approach may be costly and distortive to economic incentives and long-term growth as well as an insufficient remedy. Supervisory and regulatory responsibilities give the Federal Reserve both the insight and the authority to use techniques that are less blunt and more precisely calibrated to the problem at hand. Such tools improve our ability to manage crises and, more important, to avoid them. …