WASHINGTON — Federal Reserve Chairman Alan Greenspan, outlining for the first time his agency's views on banking deregulation, told Congress today that a Depression-era law that barred banks from certain securities activities should be abolished.
Greenspan told a House banking subcommittee that the Federal Reserve favors repeal of the 1933 Glass-Steagall Act, which separated banking and securities underwriting.
The head of the U.S. central bank, which regulates the country's largest banking institutions, said banks should be allowed to underwrite securities as long as the activities are conducted by a subsidiary of the bank's parent holding company and not directly by the bank.
Protected From Risk
Greenspan said such a separation would ensure that the bank's depositors would be insulated from the risks involved in underwriting securities.
Greenspan said the board's decision was reached in closed meetings before the record 508-point decline in the stock market Oct. 19, but he said Fed officials still believed such deregulation would be in the best interests of the financial system.
"The events since Oct. 19 have not altered our view that it is both necessary to proceed to modernize our financial system and that it is possible to do so in a way that will maintain the safety and soundness of depository institutions," Greenspan said.
Didn't Cause Depression
He said that contrary to Congress' views at the time, "bank securities activities were not a cause of the Great Depression and that banks with securities affiliates did not fail in proportionately greater numbers than banks more generally."
"While securities activities are clearly risky, the risks can be managed prudently," Greenspan said in his testimony, adding, "We believe that this goal is most effectively achieved if securities activities take place in a direct subsidiary of a holding company rather than in a bank or a subsidiary of a bank."
Wall Street investment houses now dominate the lucrative but sometimes risky business of underwriting stocks. In underwriting, a financial institution buys huge amounts of shares from a corporation and then sells them to investors, usually at a profit.