THE ECONOMY : Market Globalization Risky, Greenspan Says
Federal Reserve Board Chairman Alan Greenspan said Wednesday that the exploding growth and increasing interplay of securities markets around the world holds promise for the brokerage industry, but it also poses new risks.
Among the threats, Greenspan warned, were that greater pressure on an exchange’s clearing and settlement systems could disrupt trading. A large financial loss at a firm dealing in securities markets on a global basis could have a ripple effect in several markets.
“As international securities trading has surged, growing more rapidly than trade and output, demands for clearing services across a wide range of financial instruments have soared, placing pressures on clearing and settlement systems,” Greenspan told the Senate Banking Subcommittee on Securities.
He noted that deficient clearing systems and settlement problems helped magnify the October, 1987, stock market crash.
Impair Functions
“We got a sense of such clearing and settlement problems in October, 1987, when the options clearing system was weakened by large losses in the options market, and other difficulties emerged from inadequate coordination of pays and collects in the futures markets.
“A deficient clearing system in Hong Kong not only contributed to paralysis in that marketplace, but cast a cloud over other markets as well,” Greenspan said.
He said the globalization of markets is helping produce large multinational securities firms that act as underwriters, dealers and brokers in stock markets around the globe.
“A loss by one or more of these firms could impair that firm’s functioning in other markets, thereby potentially transmitting a disturbance to those other markets,” Greenspan said. The impact might also extend to commercial banks, which have large exposures to the securities firms, he said.
Greenspan noted that the globalization of investment flows tended to favor dollar-denominated instruments, thus helping the dollar.
He said diversified international securities portfolios are becoming increasingly important as international trade expands more rapidly than global output and domestic economies.
No Rush to Change
“Since the U.S. dollar is still the key international currency, such diversification has been and may continue to be disproportionately (moving) into the dollar,” Greenspan said.
Referring to the role of commercial banks in the securities area, the Fed chairman said he still supported increasing banks’ powers in a way that would not jeopardize their safety or that of the banking regulatory network.
He said he hoped that Congress would act on banking deregulation, but he added that he did not see any rush to move on securities laws or change the regulatory structure in that area.
The Federal Reserve, besides acting as the nation’s central bank, also regulates bank holding companies. The banks are barred from engaging in securities activities by a 1934 law, but the Fed has moved gradually to erode that barrier in response to the banks’ complaint that the regulatory fetters reduce their global competitiveness.
Greenspan also told the subcommittee that it was critical that large investment firms have sound internal risk-monitoring procedures in place. But he added that there was no substitute for strong capital reserves to act as a buffer against losses.
