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Fed: U.S. Banks Weathered Storm

The U.S. banking system, having weathered a recession and the bankruptcies of several big corporations, is in very good shape, Federal Reserve Chairman Alan Greenspan said Tuesday.

Technology and the use of sophisticated financial instruments to hedge risks have helped banks navigate through sometimes difficult economic and financial waters, the Fed chief said in remarks to the American Bankers Association's annual convention in New York.

"By any measure, banking in the United States is strong, vibrant and profitable," Greenspan said. "Under the circumstances, the present health of banking is a dramatic testament to both the management skills of bankers and the ability of regulators and legislators to adopt, albeit slowly, to change," he said.

The Federal Reserve chairman made no comments on monetary policy or the state of the U.S. economy in his remarks, which were delivered by video.

The Federal Reserve, citing signs of improvement in the economy, boosted short-term interest rates for a third time this year in September. That raised a key rate to 1.75 percent.

Some economists believe the Fed will probably increase rates for a fourth time on Nov. 10 and stand pat on Dec. 14, its last meeting of the year. Others, however, believe the Fed might skip a rate hike at the November meeting and wait to December to boost rates.

That decision will be influenced by whether or not the jobs climate is firming up. The government on Friday releases the employment report for September — the last jobs report to be issued before the Nov. 2 elections. Economists are forecasting a gain in payrolls of a net 150,000 jobs for September, up from 144,000 in August. The unemployment rate is expected to hold steady at 5.4 percent.

President Bush and his Democratic rival, John Kerry, spar frequently over the health of the economy and the availability of jobs. Mr. Bush contends his tax cuts have strengthened the economy and spurred job growth. Kerry argues that the tax cuts have failed to bring about significant job growth and have plunged the government's balance sheets deeper into red ink.

On banking, Greenspan, as he has in the past, credited the increased use of complex financial instruments known as derivatives for boosting flexibility by allowing banks and other financial institutions to spread their risks.

"Even the largest corporate defaults in history (WorldCom and Enron) ... have not impaired the capital of any major U.S. financial intermediary," Greenspan said.

Derivatives and the use of technology in risk management have helped banks be more flexible, something that aided them in dealing with the 2001 recession, he said.

He also warned bank managers to remember the lessons of past crises that had taught their predecessors "the need to manage risks, to control costs, to build capital and reserves, and generally to focus on the lessons of banking history," reports CBS MarketWatch.

Even if managers don't remember, regulators do, he said.