Greenspan: Bankers must adjust to change

Speaking at the annual convention of the American Bankers Association, Greenspan said bankers must be careful in such changing times because they are losing the advantage they have always had in information.

Competitors, with the aid of high-speech computers, have access to the same information about borrowers and financial market operations that the biggest banks have, Greenspan said.

"Financial institutions can endeavor to preserve the old way of doing business by keeping information, especially adverse information,'' from depositors, Greenspan said. "But that, I submit, would be unwise. Inevitably and increasingly it will become more difficult to do.''

Greenspan said financial markets will be able to spot banks that are releasing "questionable'' information, and he cautioned that such banks would pay a high price in loss of confidence.

In addition to rapid advances in information brought on by computers, the regulatory framework has changed with passage of last year's sweeping bank overhaul legislation, Greenspan said. The new law did away with Depression-era barriers that had separated banks, insurance companies and securities firms.

He said regulators were striving to adjust their supervision to the new law as well as a rapidly changing financial marketplace, which is creating a flood of new investment products.

"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,'' Greenspan said. "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.''

He said that in this new world of finance and supervision, public disclosure and market discipline would play larger roles in helping government regulators insure the safety of the nation's banking system.

"We have a long way to go, but this is where competitive pressures and the underlying economic forces are pushing both you and the supervisory system,'' Greenspan told the bankers.

Greenspan, in his prepared remarks, said nothing about the overall U.S. economy and what future actions the Fed may take on interest rates. The central bank has pushed interest rates up six times since June 1999 to slow economic growth and keep inflation in check.

Many economists believe the Fed is through raising rates for this year.