WASHINGTON - Technology advances have negated a strategic advantage banks once enjoyed over competitors - the superiority of their financial information - and the industry needs to modernize itself to stay competitive, Federal Reserve Chairman Alan Greenspan said Monday.

"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," Mr. Greenspan said in a speech here at the American Bankers Association's annual convention.

With financial markets operating on real-time information, banks can no longer expect to know more about market conditions than their customers or their competition, Mr. Greenspan said.

In order to remain healthy, he said, they must leave old business methods behind and be creative in their approach to new ones. "The continued success of banking organizations … is dependent upon their ability to reinvent themselves by providing new and different services and creating new and different ways to lend and to manage assets."

Bankers run grave risks if they try to flout the rules of the new economy, especially by withholding adverse information about their own liabilities, Mr. Greenspan said.

"Inevitably and increasingly it will become more difficult" to keep such information secret, he said. "And, when it becomes clear that the information coming out of an institution is somehow questionable, that institution will pay an uncertainty premium, perhaps a costly one."

The changing environment is also affecting bank supervision, Mr. Greenspan said, reiterating the Fed's oft-stated view that in the future regulators will focus less on detail-oriented supervision and more on validating banks' risk-modeling and capital allocation processes.

Regulators will also rely increasingly on market discipline as an adjunct to regulation, he said.

"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," he said. "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."

One of the greatest challenges for the Fed and other regulators, he said, is defining the two roles that the Gramm-Leach-Bliley Act outlines for the central bank: functional regulator of state-chartered banks in the Federal Reserve system, and umbrella supervisor of financial holding companies.

"Creating that blend will not be easy," Mr. Greenspan said. "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."

Related Content Online:

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.