Academic journal article ABA Banking Journal

Prof. Greenspan Gives a Lesson

Academic journal article ABA Banking Journal

Prof. Greenspan Gives a Lesson

Article excerpt

IN A SPEECH AT THE ABA ANnual Convention a few years ago, Federal Reserve Board Chairman Alan Greenspan had everybody shaking their heads after using his time to give a history of the check clearing system.

At this year's ABA Convention, some observers were thinking he'd done it again, when the Fed chairman gave another history lesson, this time on banking in the 19th century.

But Greenspan is a student of history, and a careful reading of his speech reveals his thinking on the future of bank supervision. His points were not entirely new, hut they reinforced the picture of where the Fed is heading. Here's what he said in part:

"The federal safety net for banks ... creates perverse incentives for some banks to take excessive risk. ... [and] has required that we substitute more government supervision and regulation for the market discipline that played such an important role through much of our banking history....

"In recent years rapidly changing technology has begun to render obsolete much of the bank examination regime. ... These developments reinforce the truth of a key lesson from our banking history--that private counterparty supervision remains the first line of regulatory defense ....

"Today's products and rapidly changing structure of finance mean that supervisors are backing off from detail-oriented supervision, which no longer can be implemented effectively. We are moving toward a system in which we judge how well your internal risk models are functioning and whether the risk thus measured is being appropriately managed and offset with capital. …

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