Greenspan Describes Banking Reform Plans : Regulation: The Fed chairman suggests charging banks that make risky investments more for their deposit insurance.
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WASHINGTON — Federal Reserve Board Chairman Alan Greenspan on Thursday outlined his ideas for reforming the nation’s financial system, including charging banks with risky investments more for their deposit insurance.
In his first extensive public remarks on deposit insurance reform, Greenspan told a Federal Reserve Bank of Chicago conference that the issue “should be high on our agenda” as Congress and the Bush Administration consider permitting banks to expand into securities and insurance.
Among the specific reforms he suggested were varying deposit insurance premiums according to the riskiness of a bank’s investments, more frequently examining banks’ books, more swiftly seizing weak banks and requiring bank owners to risk more of their own money.
Greenspan did not address such proposals as cutting back on the $100,000-per-account insurance, limiting insurance to one account, imposing a “deductible” on the insurance or finding a way to allow large banks to fail without endangering the system.
“He is proceeding gingerly . . . but in the chairman are the seeds of a most radical reform of our existing financial system,” said Kenneth A. Guenther, executive vice president of the Independent Bankers Assn. of America, which represents smaller banks wary of deposit insurance changes.
The Treasury Department is due to release its banking reform plan by February. Greenspan is expected to be a major influence in that plan’s development and in congressional debate on the issue next year.
Greenspan appeared to reject the notion of simply doing away with deposit insurance and other safeguards, which some free market conservatives advocate.
“The United States has not suffered a financial panic or systemic bank run in the last 50 years. In large part this reflects the safety net,” he said.
But the protection comes at a cost, he said. Three parts of the safety net pose a “moral hazard” for bankers by allowing them to shift some of the risks of their actions onto the public.
They are deposit insurance, the ability of banks to borrow at low rates in emergencies from the Fed’s discount window and banks’ access to the Fed’s electronic payments wire, which guarantees payments between banks.
Reform of the safety net, Greenspan said, should be considered in tandem with expanding bank powers.
Offering banks no new powers likely would cause commercial banking to shrink in relationship to the rest of the financial system. That, in turn, “may create systemic risk similar to that faced in earlier years.”
Bank owners now risk about six cents of every dollar they lend. However, Greenspan noted that in the 1800s, before the creation of deposit insurance and the discount window, bankers risked 25 cents to 50 cents for every dollar they loaned. That encouraged them to use more caution.
A text of Greenspan’s speech, delivered at the Chicago Fed’s Annual Conference on Bank Structure and Competition, was released in Washington.
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