Re: financial times article

["ÁÎ×Ó¹â Henry C.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

Greenspan's speech deals with much more pedestrian issues than a quest for a new theory of money, Post-Keynesian or
otherwise.  He is mainly concerned with freeing the banks from residual New Deal era restrictions despite the Financial
Modernization Act which essentially turns banks into all service financial institutions.  In this new era of unregulated
financial markets, these reincarnated banks continue to keep one fundamental advantage: of being able to lean on the Fed as
lender of last resort. This advantage is fueling the banks' current acquisition fever of all sorts of financial entities.
This advantage was granted to banks precisely because of a recognition that the market was not an effectively supervisory
agent, thus the rationale for the creation of the Federal Reserve System.  Now Greenspan is arguing that the market is the
sole de facto regulator of the banking industry.  He does recognize that counterparty risk is a critical problem, as the
collapse of LTCM illustrated.  The fact is that derivatives traded over the counter have overshadowed traditional banking
activities for money center banks.  Thus the issue is not even the health of a bank's loan portfolio or the creditworthiness
of its borrowers.  The issue is a bank's counterparty risk exposure from structured finance.  The Fed's role as lender of
last resort provides only too flimsy a safety net for the heavy weight structured finance risk exposure.  Yet Greenspan does
not want to do anything that stands in the way of  providing benefits to society through the willingness of banks to take
risks and from their use of a relatively high degree of financial leverage. That is Greenspan's message.  He is essentially
saying if you can't be good, at least be careful.


Greenspan's full speech:
http://www.bog.frb.fed.us/boarddocs/speeches/2000/20000918.htm

Greenspan said:

 Many of the benefits that banks provide to modern societies derive from their willingness to take risks and from their use
of a relatively high degree of financial leverage. Through leverage, in the form principally of taking deposits but
increasingly of other forms of borrowing as well, banks perform a critical role in the financial intermediation process; you
provide savers with additional investment choices and borrowers with a greater range of sources of credit, thereby
facilitating a more efficient allocation of resources and contributing importantly to greater economic growth.

The subsequent evidence appears persuasive that the combination of a lender of last resort (the Federal Reserve) and federal
deposit insurance have contributed significantly to financial stability and have accordingly achieved wide support within
the Congress. As has often been the case in our long financial history, such significant government intervention has not
been without cost. The federal safety net for banks, which clearly diminishes both the incentive for, and the effectiveness
of, private market regulation, creates perverse incentives for some banks to take excessive risk. Indeed, the safety net 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.

Although the safety net necessitates greater government oversight, in recent years rapidly changing technology has begun to
render obsolete much of the bank examination regime established in earlier decades. Bank regulators are perforce being
pressed to depend increasingly on greater and more sophisticated private market discipline, the still most effective form of
regulation. Indeed, these developments reinforce the truth of a key lesson from our banking history--that private
counterparty supervision remains the first line of regulatory defense. This is certainly the case for the rapidly expanding
bank options and swaps markets and other off-balance-sheet transactions. The speed of transactions and the growing
complexities of these instruments have required federal and state examiners to focus supervision more on risk-management
procedures than on actual portfolios.

The impact of technology on financial services and therefore, of necessity, the way it will affect supervision and
regulation as we move into the twenty-first century is the critical issue that frames the supervisory agenda now before us.
The acceleration in the growth of technology that has so greatly affected our economy in general has also profoundly
expanded the scope and utility of financial products over, say, the past fifteen years. The substantial increase in our
calculation capabilities has resulted in a variety of products and ways to unbundle risk. What is particularly impressive is
that there is no sign that this process of acceleration in financial innovation is approaching an end. We continue to move
at an exceptionally rapid pace, fueled by both computing and telecommunications capabilities.

The explosion in the quantity and quality of information is reducing uncertainty, and that is particularly important because
the banker's stock in trade, the basis of an institution's franchise value, is information. The knowledge of the potential
viability of their customers is all that prevents bankers from the equivalent of lending on the outcome of a roulette
wheel's spin.

 To the extent that the newer technologies have opened up vast new areas of information, the banker's knowledge of the
borrower's capacity to repay a loan is significantly enhanced. Risk premiums, internal risk classifications and modeling,
and credit scoring are becoming ever more finely tuned.

 But the same advances in information innovation and communication are available to all of a banker's competitors as well.
Thus, although increased information lowers the risk of lending, competition inhibits those advantages from translating into
longer-run enhanced profit margins.

 Moreover, the quickened pace of market adjustments resulting from the newer technologies has significantly shortened the
interval over which a debt can move from investment grade to default. This delimits the capacity of a bank to adjust its
exposure to a failing borrower before the bank is confronted with default.

 Uncertainty is the creator of risk premiums, the creator of higher funding costs throughout the financial system and indeed
throughout the economy generally. The increasing availability of accurate and relevant real-time information, by reducing
uncertainty, is over time reducing the cost of capital. That is important
 to financial holding companies and financial institutions generally in their roles of both lender and borrower.

 It is important in their role as borrower because their funding costs are critically tied to the perceived level of
uncertainty about their condition. It is important in their role as lender because a dramatic decline in uncertainty as a
consequence of a large increase in real-time information availability engenders a reduction in proprietary information.

 One of the major reasons that financial intermediation worked well in years past, in addition to the values of
diversification, was that financial institutions possessed information others did not have. This asymmetry of information
was capitalized in fairly significant rates of return. But this advantage is rapidly dissipating, as any bank lender will
testify. We are going to real-time systems, not only with
 transactions but with knowledge as well.
 What does all this mean for supervision and regulation in the twenty-first century?
 If the supervisory system is to effectively enhance the capacity of the country's financial systems to function, it must
adjust to the changing structure of that system. There is no frozen fix on supervision and regulation. We are always
changing and moving forward, endeavoring to adjust in a manner that facilitates
 innovation.

 We are in a dynamic system that requires not just us but also our colleagues in the Group of Ten to adjust. Today's
products and rapidly changing structures 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. And we are
moving toward a system in which public disclosure and market discipline are going to play increasing roles, especially at
our large institutions, as a necessity to avoid expansion of invasive and burdensome supervision and regulation.

 The Financial Modernization Act is only a flag on the way to future changes. It is a piece of legislation that will bring
major changes for the good, I trust, in all respects. During the transition, the Federal Reserve and other supervisors must
work through the issues of how to blend functional regulation and umbrella supervision. Creating that blend will not be
easy. And it must be done substantially right the first time because, with the financial system changing so rapidly, we do
not have the luxury of reversing course and going in a wholly different direction.   (End)



Kazuhiro Kurose wrote:

> Dear everyone
>
> I found interesting article in FT. I would like to introduce its summary. This is article at 19/ 9.
>
> Title: THE AMERICAS: Many US banking rules obsolete, says Greenspan
> By PETER SPIEGEL
>
> Alan Greenspan, chairman of the US Federal Reserve, said yesterday the rapid pace of technological change had rendered
> many US banking regulations obsolete, and called on developed countries to update their laws to take into account the
> rapidly increasing speed of financial transactions.
> In a speech to the American Bankers' Association, Mr Greenspan did not offer any specific recommendations on modernising
> banking rules. But he noted that regulators were becoming much more reliant on the private market to discipline itself.
> "These developments reinforce the truth of a key lesson from our banking history - that private counterparty supervision
> remains the first line of regulatory defence," he said.
> As the industry became more self-regulated, Mr Greenspan said, public disclosure would become increasingly important,
> especially if large banks hoped to ward off more intrusive regulations.
> Mr Greenspan made the warnings despite recent sweeping banking reform legislation, which repealed many Depression-era
> regulations preventing commercial banks, insurers and securities firms from entering each other's business.
> The reforms also helped modernise banking rules, giving regulators new tools to supervise shaky banks.
> But Mr Greenspan said the new legislation was "only a flag on the way to future changes", adding that regulators around
> the world would find themselves increasingly forced to become less "detail-oriented" and more focused on "umbrella
> supervision".
> Mr Greenspan predicted the shift would require regulators to move away from concentrating on looking for irregularities
> in specific debt portfolios. Instead, supervisors would be focused on ensuring that internal risk models set up by banks
> were working properly and that the risks were being appropriately managed.
> "We are in a dynamic system that requires not just us, but also our colleagues in the Group of Ten to adjust," he said.
> "It must be done substantially right the first time because, with the financial system changing so rapidly, we do not
> have the luxury of reversing course and going in a wholly different direction."
> Despite the regulatory perils presented by advances in telecommunications and computing, Mr Greenspan also emphasised
> that new technology was helping reduce the cost of capital for banks, making the industry more efficient and cheaper for
> consumers.
> He noted that the spread of real-time information, for example, had made it easier for banks to judge a borrower's risk
> of default.
>
> Mr. Greespan argued that rapid pace of technological change make banking regulations obsolete, however, I can't imagine
> concretely. What kind of regulations have been obsolete yet?
> And from theoretical perspective, I think that the situation argued in the article is very similar to Minsky's
> arguments, in particular, 'Central banking and Money Market Changes' published at QJE in 1957. As you know, Almost
> Post-Keynesian regard him as one of pioneers of Post-Keynesian, but some economists such as LP-Rochon never regard him
> as Post-Keynesian. Apart from the interpretation whether Minsky is Post-Keynesian or not, I think that the world where
> he considered is very realistic.
> What do you think about my opinion?
>
> Sincerely
>
>  **************************************
>   Kazuhiro Kurose
>   Graduate School of Economics and Business
>   Administration, Hokkaido University
>   Kita 9 Nishi 7, Kita-Ku, Sapporo, Japan
>   060-0809
>     TEL: +81-11-716-2111 ex:2786
>  **************************************