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Fed chief suggests loan fee
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May 7, 1998: 4:51 p.m. ET
Greenspan says extra charge might reduce risk in interbank lending
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NEW YORK (CNNfn) - Raising fees required for interbank loans could help curtail the type of excessive risk-taking that has roiled Asian economies and impeded growth elsewhere, Federal Reserve Chairman Alan Greenspan said Thursday.
Imposing such a charge against the principal risk-taking bank, or "sovereign guarantor," Greenspan said, would lessen the "moral hazard" inherent in many such transactions, which he termed "the Achilles heel" of the international financial system. This would particularly be true "in more vulnerable countries where (the principal bank's) guarantee is more likely to be called upon and (where) cost might deter some aberrant borrowing."
"For example," he continued, (principal lenders) "could charge an explicit premium, or could impose reserve requirements, earning low or even zero interest rates on interbank liabilities."
Greenspan suggested raising the level of capital requirements on borrowing banks, making it contingent not only on the bank's assets, but also on the nature of the funding.
Greenspan delivered his remarks during a lunchtime address Thursday at the Federal Reserve Bank of Chicago.
The speech did not specifically deal with the U.S. economy or interest rates -- subjects that have drawn intense scrutiny in recent days, as rumors fly that the Federal Reserve may be thinking of raising rates to cool down the economy. As of mid-afternoon Thursday, the Dow was continuing a two-day decline as interest rate speculation persisted.
Greenspan focused instead on the lingering economic crisis in Asia, which, most economists agree, was precipitated by many local governments' insulating banks from losses, and thus lowering the risk of loans.
Confidence was torn asunder
Speaking about the causes behind the rapid erosion of the Asian economies, Greenspan said, "In an environment of weak financial systems, lax supervisory regimes, and vague assurances about depositor or creditor protections, the state of confidence so necessary to the functioning of any banking system was torn asunder."
Greenspan also cautioned would-be white knights against lavishing easy money on the reeling economies. Doing so could pose another "moral hazard" that may "merely induce a ratcheting up of the risks that a nation's borrowers choose to take on."
Turning to regulatory issues, Greenspan stressed the need for well-trained independent bank examiners -- something he said is lacking in many economies.
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Federal Reserve Board
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