Central banks like the Federal Reserve are migrating away from a cookie-cutter approach to bank supervision toward more flexible, market-oriented systems, Alan Greenspan said Monday.
In a speech to the American Bankers Association convention in Phoenix, the Federal Reserve chairman made no comments about U.S. monetary policy or the U.S. economy. His remarks were the first since the Federal Open Market Committee decided to leave interest rates unchanged and to adopt an "asymmetrical" bias toward tighter policy.
Greenspan will address monetary policy and economic issues in a speech on Friday to the National Italian American Foundation in Washington.
It's more important for central banks to get the process or framework of bank supervision right than to finalize each detail, Greenspan told the bankers.
"It is the framework that we must get right," he said. "In particular, we should avoid mechanical or formulaic approaches that, whether intentionally or not, effectively 'lock' us into particular technologies long after they become outmoded."
Greenspan said the Fed's bank supervision practices are evolving along with the industry's changes, although perhaps not as fast as the bankers would like.
"We are endeavoring to develop a program that is the least intrusive, most market-based, and most consistent with current and future sound risk-management practices possible," Greenspan said.
Along with other national bank regulators, the Fed has adopted a "three-pillared approach to prudential oversight," by relying on market discipline wherever possible, tailoring supervision to the specific institution and its risks, and ensuring that capital requirements do not induce banks to use loopholes that inadvertently increase risk.
These approaches require the supervisors to work closely with the banks themselves, Greenspan said. The Fed has created special teams of bank examiners to specialize in each of the thirty or so large, complex banking organizations.
By Rex Nutting