WASHINGTON — Federal Reserve Chairman Alan Greenspan urged Congress on Monday to revamp the nation's banking system, which he said was "frozen within a regulatory structure fashioned some 50 years ago."
"It is essential that Congress come to grips with the difficult decisions that must be made to update our laws to the new circumstances of technology and competition," Greenspan said in his first testimony to a congressional committee since becoming head of the central bank two months ago.
Banks have been pressuring Congress to allow them to expand into other enterprises, such as the underwriting of securities. But securities firms have so far blocked all efforts to eliminate the barriers between the banking and securities industries that were established in 1933.
Greenspan told a House Energy and Commerce subcommittee that the securities industry had expanded rapidly in recent years, offering new products and competition in areas once reserved for banks.
"All of these developments have amounted to a very much more competitive environment for banking, while at the same time banking has been frozen within a regulatory structure fashioned some 50 years ago," he testified.
Banks have been trying to circumvent the congressional impasse by using loopholes in existing laws to expand into other enterprises. But Congress closed the loopholes in August, barring federal regulators from granting any further powers to banks until next March 1. Lawmakers hope to have forged a legislative compromise on the issue by that time.
Greenspan said this approach would give Congress time to "review our banking and financial laws and to make decisions on the need for financial restructuring legislation before the moratorium expires."
Greenspan, however, stopped short of spelling out just what type of legislation he would favor. He said the other members of the Federal Reserve Board were still studying the issue and they had not reached a consensus.