Greenspan: Bank Flexibility, Derivatives Help Economy Cope

By Agence France-Presse Federal Reserve Chairman Alan Greenspan said May 8 that the vitality of most U.S. banks has helped the economy to withstand recent shocks, giving unusual praise for the use of derivatives. He told an audience at the Federal Reserve Bank of Chicago that the U.S. economy has "proven remarkably resilient" in the face of severe shocks, including the collapse of equity values, terrorist attacks and geopolitical turmoil. Greenspan said the use of a growing array of derivatives and the related application of more sophisticated methods for measuring and managing risk are key factors underpinning the system's enhanced resilience. "Derivatives have permitted financial risks to be unbundled in ways that have facilitated both their measurement and their management," he said. "To be sure, economic growth has been subpar for some time, but we seem to have experienced a significantly milder downturn than the long history of business cycles and the severity of the shocks to the economy would have led us to expect," he added. Greenspan said one "striking feature" that differentiates this cycle from earlier ones is the "continued vitality" of most U.S. banks and non-bank financial institutions. "In past cycles, economic downturns often produced credit losses that were so severe that the capacity of those institutions to intermediate financial flows was impaired," he said. As a result, recessions were prolonged and deepened, he added. "This time, the economic downturn has not significantly eroded the capital of most financial intermediaries, and the terms and availability of credit have not tightened to such an extent as to be significant factors in deepening the contraction or impeding the recovery," he said. Copyright Agence France-Presse, 2003