Comment: Greenspan Testimony Derails Reform Efforts

By Isaac, William M. | American Banker, May 25, 1999 | Go to article overview

Comment: Greenspan Testimony Derails Reform Efforts


Isaac, William M., American Banker


The outlook for financial modernization legislation has taken a decided turn for the worse.

Federal Reserve Chairman Alan Greenspan dealt a blow to the reform bill with his recent testimony before a subcommittee of the House Commerce Committee.

He threw down the gauntlet, declaring "the long-term stability of U.S. financial markets and the interests of the American taxpayer would be better served by no financial modernization bill rather than one that allows the proposed new activities to be conducted by the bank."

In so doing, Mr. Greenspan expressly rejected Treasury Secretary Robert Rubin's compromise proposal that had been overwhelmingly approved by the House Banking Committee.

Many champions of financial modernization, myself included, believed Mr. Rubin had gone too far in his attempts to mollify Mr. Greenspan by restricting the activities of bank subsidiaries.

For more than two decades the House Commerce Committee has been a stumbling block to obtaining a decent reform bill. The committee is poised to conduct its mischief again, particularly on the issue of bank subsidiaries.

If Chairman Greenspan had supported the measure approved by the Banking Committee, the Commerce Committee might have gone along. Now it seems almost certain the Commerce Committee will approve a bill the administration has vowed the President will veto, as well he should.

Mr. Greenspan advanced the same arguments he has made previously. Banks, he asserts, are subsidized by the federal safety net (i.e., deposit insurance and the Fed window).

New activities must be conducted in holding company subsidiaries to prevent "leakage" of the subsidy from the bank to the new activity. Moreover, holding company subsidiaries provide more protection to the Federal Deposit Insurance Corp. than do bank subsidiaries, according to Mr. Greenspan.

Most experts reject these arguments. There clearly is no taxpayer subsidy of banks. The FDIC is sitting on nearly $40 billion accumulated from banks during the past 65 years. …

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