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Fed urges leverage controls
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November 5, 1998: 1:27 p.m. ET
Greenspan urges global financial institutions to tighten lending agreements
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NEW YORK (CNNfn) - Federal Reserve Chairman Alan Greenspan on Thursday urged international financial institutions, especially those in troubled emerging markets, to tighten their policy safeguards to contain future economic crises before they become a global contagion.
At the same time, he said, the high degree of leverage exercised by financial intermediaries had only worsened Asia's financial crisis and must be curbed.
"Clearly, to live with enhanced global finance, it has become necessary to find ways to buttress our financial institutions to be able to weather the dramatic increase in capital flows, both domestic and cross-border, before they strain human capacities [for risk]," he told members of the Securities Industry Association.
Greenspan urged countries in crisis to adopt sound policies. He said "areas crucial to increased discipline" included improved bankruptcy procedures and better arrangements for risk sharing between debtors and creditors.
"As the financial system becomes ever more sensitive to change, consideration needs to be given to discourage excess leverage by financial intermediaries worldwide," he said.
"A key conclusion stemming from our most recent crises is that economies cannot enjoy the advantages of a sophisticated international financial system without the internal discipline that enables such economies to adjust without crisis to changing circumstances."
The same computer and technological advances that have helped increase industry efficiency, he added, have contributed to the global Asian contagion by improving the capacity to "transmit ill-advised investments."
The tendency for the new high-tech financial system to exacerbate market fluctuations, he said, may outweigh the advantages.
"Notwithstanding the demonstrable advantages of the new international financial system, the Mexican financial breakdown in late 1994 and, of course, the most recent episodes in East Asia and elsewhere, have raised questions about the inherent stability of this new system," Greenspan said.
He also noted that "investor fright" had caused a rush toward safe U.S. Treasury securities, but said that may dissipate "and yield spreads and liquidity premiums will soon fall into more normal ranges."
But Greenspan, who has the power to rock markets with the mere hint of interest-rate action, made no comment about the U.S. or global economic outlook. 
--from staff and wire reports
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