Concerned about global financial stability, Federal Reserve Board Chairman Alan Greenspan called Thursday for new curbs on bank-to-bank lending.
"Excessive short-term interbank funding, especially cross-border, may turn out to be the Achilles' heel of an international financial system that is subject to wide variations in financial confidence," Mr. Greenspan said.
Loans banks make to each other are considered relatively risk-free because of an assumption that governments would step in to cover any defaults. Mr. Greenspan said the presumed safety net could cause cross- border interbank credit to rise above levels that "would be supported by unsubsidized markets themselves."
Speaking at the Federal Reserve Bank of Chicago's annual banking conference, the Fed chairman offered three options for making interbank credit less attractive by increasing its costs.
First would be higher capital requirements for interbank borrowers, which "can be thought of as providing a larger cushion for the sovereign guarantor in the event of the bank's failure," he said. "It would shift more of the burden onto the private sector."
Second, banks receiving interbank credit might pay a "safety net" fee similar to an insurance premium. This could "deter some aberrant borrowing" in countries with weak financial systems, Mr. Greenspan said.
His final option was to increase the reserves a bank must hold against loans to other banks. The current capital requirement is 1.6% for these loans, well below the 8% on corporate loans. Raising the requirement would make these loans more expensive and reduce their attractiveness to other banks.
Martin Mayer, a guest scholar at the Brookings Institution in Washington, said the Greenspan proposal made sense. "An increase in the capital requirements is clearly indicated by the Asian crisis," he said.
But Bert Ely, president of the consulting firm Ely & Co., Alexandria, Va., said making interbank credit more expensive would invite other, unregulated competitors into the market. In a crisis, a decision by these lenders to cut off funding could cause systemic problems, he warned.
After his speech, while answering questions about pending financial reform legislation, Mr. Greenspan argued against allowing banks to underwrite securities or insurance in operating subsidiaries. This would expand the safety net to these products and eliminate the need for a holding company, he said.
If banks eliminate holding companies, the Fed would lose its primary means of overseeing the banking industry, he said. Reading supervisory reports by other regulators would be insufficient, he said.
"You would be surprised how little information is in there," he said. "One of the reasons we keep them secret is we are so embarrassed."
Mr. Greenspan said the scheduled House vote next week on financial reform is really about whether to expand or restrict operating subsidiaries. "How this issue is resolved will determine the regulatory structure in the United States for the next generation," he said.
Currently, the bill in the House would restrict bank operating subsidiaries. Mr. Greenspan has encouraged lawmakers to pass the measure, while the Clinton administration Thursday reiterated its opposition.
In his speech, Mr. Greenspan called for more disclosure worldwide of government and corporate financial data, especially information on asset prices, interest rates, and corporate debt.
"Increased transparency can expose the prevalence of pending problems," he said.
Governments also should remove the legal impediments that prevent foreign banks from seizing collateral and force banks to quickly remove nonperforming assets from their books, he said.
Mr. Greenspan criticized the quality of bank examinations, saying supervisors in many countries lack experience and training. "We need independent bank examiners who understand banking and business risk, who could in effect make sound loans themselves," he said.