alan greenspan : the state of the banking industry statement of mr alan greenspan, chairman of the board of governors of the us federal reserve system, before the committee on banking, housing, and urban affairs, us senate, washington, 20 april 2004. * * * chairman shelby, senator sarbanes, and members of the committee, i am pleased to be here this morning to discuss the condition of the u. s. banking system and various related matters. they include improved risk - management practices of banks, the current status and direction of our regulatory efforts to revise capital standards for internationally active banks, deposit insurance, and the ongoing consolidation process within our domestic banking industry. growth in the size and complexity of the largest u. s. and foreign banking organizations, in particular, has substantially affected financial markets and the supervisory and regulatory practices of the federal reserve and other bank regulatory agencies around the world. it has, in part, required authorities to focus more than before on the internal processes and controls of these institutions and on their ability to manage risk. only through steady and continued progress in measuring and understanding risk will our banking institutions remain vibrant, healthy, and competitive in meeting the growing financial demands of the nation while keeping systemic risk at acceptable levels. therefore, the regulatory authorities must provide the industry with proper incentives to invest in risk - management systems that are necessary to compete successfully in an increasingly competitive and efficient global market. when i last discussed the condition of the banking industry with this committee in june 2001, the industry ’ s asset quality had begun to decline, but from a relatively high level, and banks were generally well positioned to deal with the emerging problems. moreover, as early as the late 1990s, both the industry and bank supervisors had begun to address the slippage in credit standards that was one of the causes of the drop in asset quality. by most measures, this was an unusually early stage in the economic cycle to begin addressing such deterioration. today, with the benefit of hindsight, we can see that the weaknesses i cited then have indeed been mild for the banking system as a whole and that the system remains strong and well positioned to meet customer needs for credit and other financial services. during the past two years, in particular, the industry extended its string of high and often record quarterly earnings. for the full year 2003, commercial banks reported net profits of more than $ 100 billion while maintaining historically high equity and risk - based capital ratios and enjoying brisk asset growth. although the demand for business

affiliate that was sizable, though hardly an industry leader, but its downfall seems pretty clearly connected to its exposure to subprime mortgages that it had written directly or acquired through mergers with other institutions. see, for example, the following two papers and the references therein : franklin allen, ana babus, and elena carletti ( 2012 ), “ asset commonality, debt maturity and systemic risk, ” journal of financial economics, vol. 104 ( june ), pp. 519 – 34 ; and andrei shleifer and robert vishny ( 2011 ), “ fire sales in finance and macroeconomics, ” journal of economic perspectives, vol. 25 ( winter ), pp. 29 – 48. bis central bankers ’ speeches proponents of breaking up firms by business line may reply that the next financial crisis will not likely have the same genesis as the last, and that separating commercial from investment banking could at least mitigate the risks of extending the safety net provided depository institutions to underwriting, trading, and other activities of very large firms. but an io perspective suggests that the proposal could entail substantial costs. the reinstatement of glass - steagall would mean that bank clients could no longer retain one financial firm that would have the capacity to offer the whole range of financing options – from lines of credit to public equity offerings – depending on a client ’ s needs and market conditions. moreover, many banks that are far too small ever to be considered tbtf do provide some capital market services to their clients – often smaller businesses – a convenience and possible cost savings that would be lost under glass - steagall prohibitions. 8 with the present state of research, it is virtually impossible to quantify the social benefits of these economies. however, what seems the likelihood of nontrivial benefits from current affiliations is a good reason to be cautious about adopting this proposal. capping nondeposit liabilities proposals to place a cap on a bank ’ s nondeposit liabilities as a fraction of u. s. gross domestic product ( gdp ) have been promoted as more directly responsive to the sources of systemic risk than are proposals to reinstate glass - steagall or to cap the total assets of a bank. many studies of the financial crisis demonstrate that the reliance of large financial firms on nondeposit funding made them, and the financial system as a whole, susceptible to the dramatic runs that peaked in the fall of 2008. for the largest u.