Capital requirements of banks must be raised, says Greenspan

Former Federal Reserve Chairman Alan Greenspan said banks should be forced to hold more capital on their balance sheets, reinforcing a weekend push by finance chiefs from the Group of 20 nations.

“Capital requirements even during non-crisis periods have to have a larger buffer,” the 83-year-old former policy maker said on Monday via teleconference to the Antique India Markets Conference in Mumbai. “We do need significant changes.”

Noting the world economy was emerging from of the financial crisis “fairly quickly,” Greenspan made his call for tighter capital requirements two days after a G-20 meeting in London proposed having banks increase the quantity and quality of assets they keep in reserve for when economies stumble. The drive to revamp regulation comes after excessive risk-taking by the world’s banks led to $1.61 trillion in losses and writedowns, taxpayer-funded bailouts and a global recession.

“Financial intermediaries allowed institutions to go into default by taking this kind of risk,” Greenspan said. “There’s no substitute for capital. Don’t think the crisis could have been prevented unless we can change human nature.”

Once regarded by some observers as the greatest central banker, Greenspan has seen his legacy criticized since the US subprime-mortgage market collapsed in 2007. Having run the Fed from 1987 to 2006, he said last in October that a “flaw” in the ideology of free-market risk management he had espoused contributed to the “once-in-a-century” credit crisis.

‘Euphoria’
Greenspan on Monday repeated how rare the turmoil was and blamed it on an under-pricing of risk or “building of euphoria” that emerged at the start of the century as interest rates and inflation ran into single-digits.

His hands-off approach to asset bubbles has been challenged by some Fed district-bank presidents, such as Janet Yellen. Former Fed Vice-Chairman Alan Blinder and Stanford University professor John Taylor are among the economists who say Greenspan also left interest rates too low for too long earlier this decade, encouraging the easy credit that fostered the housing bubble.

Speaking a week before the first anniversary of the collapse of Lehman Brothers Holdings Inc., he said that event had led to a “massive contraction” in trade financing and surge in inventories. He predicted some exotic financial instruments, such as collateralized debt obligations, won’t return even after the crisis passes.

He predicted that China will witness a “diffusion of power” and that global demand for oil won’t be “radically changed.” In the US, the phenomenon of mortgages exceeding the value of homes appears to be peaking, he said.