WASHINGTON -- Congress should remove all restrictions that prevent banks from fully competing in securities underwriting and insurance brokerage, Federal Reserve Board Chairman Alan Greenspan said Monday.
In remarks scheduled for delivery late Monday afternoon in Boston, the Fed chairman said banks should begin lobbying for those reforms right away, now that Congress has approved interstate branching.
Mr. Greenspan described insurance and securities powers as the two "most pressing reforms" needed in the industry.
He said insurance sales are "virtually riskless" and that the sophisticated controls banks place on securities activities makes the danger associated with that line of business "manageable."
Mr. Greenspan specifically called for the repeal of Section 20 of the Glass-Steagall Act, which separates the commercial and investment banking industries.
Under the Fed's current interpretation of Section 20, only 10% of a bank's revenues from securities can come from "impermissible securities," such as corporate equities. The rest must come from instruments that banks are explicitly permitted to deal in, such as municipal bonds.
Repealing Section 20 will make it easier for banks to deliver financial services to their customers, Mr. Greenspan said. And, he said regional and smaller companies could particularly benefit from the change because local banks that know their needs could now serve them.
Mr. Greenspan cautioned that regulators should not allow banks unbridled freedom. "Prudent risk-taking must be encouraged," he said, "but excessive risk-taking deterred."
The way to achieve this medium is to rely on on-site examinations rather than on detailed, new regulations, he said.
But, those examinations should change. He said examiners should focus on a bank's overall risk position, rather than solely on capital and loan loss reserves.
Mr. Greenspan also expressed some uneasiness with the effect deposit insurance has on a bank's risk-management operations. He explicitly rejected the idea of repealing deposit insurance requirements, saying that it has the government support. He also opposed expanding insurance to nonbanks, saying that would expand its "corrosive" effects.
The solution, he said, is to increase capital standards and step-up oversight in an effort to blunt any incentive deposit insurance might give an institution to gamble with unsound investments.