Greenspan says market discipline critical in banking regulation

WASHINGTON - In a rapidly changing world, government regulators need to rely more and more on the discipline of the marketplace to promote sound practices at banks and other financial institutions, Federal Reserve Chairman Alan Greenspan said Monday.

Greenspan called ''truly astonishing'' the diversity of financial product choices being offered to consumers and businesses today.

''What is particularly impressive is that, fueled by both computing and telecommunications capabilities, the pace of financial innovation does not appear to be slowing,'' he said in a speech to a conference sponsored by Women in Housing & Finance Inc., a Falls Church, Va.-based professional organization.

He said that this rapid change in technology has begun to make obsolete many of the regulatory practices government agencies have used in past decades to guarantee the safety and soundness of the nation's financial institutions.

Greenspan said that the speed of financial transactions today and the growing complexity of the financial instruments being offered to the public are requiring regulators to focus more on making sure institutions have ways of managing risks rather than examining the portfolios being held by banks and other financial institutions.

''Regulators are ... being pressed to depend increasingly on greater and more sophisticated private market discipline, the still most effective form of regulation,'' he said.

Greenspan said that the efforts of the Federal Reserve and other financial market regulators in recent years have been focused on harnessing market forces to support government bank supervision efforts.

Congress in 1999 passed landmark legislation that dismantled Depression-era restraints separating banks, security firms and insurance companies. Greenspan said the new law was a major step forward in making federal law more consistent with the realities of the marketplace.

''Congress ensured that the financial services industry can expand and innovate with far fewer artificial constraints,'' he said.

While the rapid pace of change presented challenges for regulators, Greenspan said the best way to proceed was to provide maximum leeway to the marketplace to ''participate in prudent innovation.''

''Allow markets to signal the winners and losers among competing technologies and market structures and overall - as the medical profession is advised, do no harm,'' Greenspan said of banking supervisors' responsibilities.

Greenspan devoted his speech to banking regulation issues and did not address current economic conditions or the future course of interest rates.

The Federal Reserve last week, in a widely anticipated move, left interest rates unchanged, preferring to wait and see whether the six rate increases it has already approved will be enough to slow the economy and keep inflation under control.

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On the Net:

Federal Reserve: http://www.federalreserve.gov

Women in Housing and Finance: http://www.whfdc.org