just as important as the fostering of innovation is the protection the dual banking system affords against overly rigid federal regulation and supervision. the key to protecting against overzealousness in regulation is for banks to have a choice of more than one federal regulator. with two or more federal regulators, a bank can choose to change its charter thereby choosing to be supervised by another federal regulator. that possibility has served as a constraint on arbitrary and capricious policies at the federal level. true, it is possible that two or more federal agencies can engage in a “ competition in laxity ” - - but i worry considerably more about the possibility that a single federal regulator would become inevitably rigid and insensitive to the needs of the marketplace. so long as the existence of a federal guarantee of deposits and other elements of the safety net call for federal regulation of banks, such regulation should entail a choice of federal regulator in order to ensure the critical competitiveness of our banks. the job of a banking regulator, difficult under any circumstances and for a variety of reasons, is especially critical as it regards the connection running between banking risk and the impact of such risk - taking on the macroeconomy. as i have been pointing out, the historic purpose of banks is to take risk through the extension of credit to businesses and households - credit that is so vital to the growth and stability of the economy. but this fact creates a significant conflict for banking regulators. on the one hand, regulators are concerned with the cost of bank failure to the taxpayer and the impact of such failures on the general safety and soundness of the financial system. on the other hand, banks must take risks in order to finance economic expansion. decisions about tradeoffs must be made. in the early 1990s, we saw how, in response to fdicia, new regulations, weakened capital, and large loan losses, banks reduced their willingness to take risks, thereby contributing to a credit crunch and slower economic growth. this recent episode demonstrates clearly how tricky are these tradeoffs between necessary risk taking and protecting the banking system ; a swing too far in either direction can create both short - term and long - term difficulties. a regulator without responsibility for macroeconomic growth and stability tends to have a bias against risk - taking. such a regulator receives no praise if the economy is functioning well, but is criticized if there are too many bank failures. for such a regulator, the tradeoffs are one - sided and, if the decisions of such a regulator

mr. greenspan looks at the need for financial reform and the importance of a decentralized banking structure in the united states remarks by the chairman of the board of governors of the us federal reserve system, mr. greenspan, at the annual convention of the independent bankers association of america in phoenix, arizona, on 22 / 3 / 97. as always, it is a pleasure to address this convention of the independent bankers association of america. this is the sixth year i have addressed this convention, and during that time four separate congresses have debated how best to reform the financial system. i last spoke to you about financial reform in 1994, in orlando, and it is clear that the real world occurrences of the past three years have not diminished the relevance of those words. therefore, i shall reemphasize some of those thoughts today in the context of legislative proposals that are now before the current congress. let me begin by reiterating the essential thrust of the federal reserve ’ s position regarding financial reform. we believe that any changes, either in regulation or legislation, should be consistent with four basic objectives : ( 1 ) continuing the safety and soundness of the banking system ; ( 2 ) limiting systemic risk ; ( 3 ) contributing to macroeconomic stability ; and ( 4 ) limiting the spread of both the moral hazard and the subsidy implicit in the safety net. my remarks today will focus primarily on the macroeconomic and risk implications of financial reform and how, in particular, such reform must enable community banks to maintain their critical role in the macroeconomy. the importance of the community bank our banking system is the most innovative, responsive, and flexible in the world. at its core is a banking structure that is characterized by very large numbers of relatively small banks - - more than 7000 separate banking organizations. this banking structure is very different from that of other industrialized nations - - for example, there are less than 500 banks incorporated in england, germany, and canada combined. to be sure, the very largest u. s. banking organizations account for the lion ’ s share of banking assets. still, no one institution controls more than 6 percent of total domestic banking assets in the united states. this highly decentralized, highly diverse banking structure is almost certainly the direct result of our market economy itself. indeed, it is revealing that the first edition of adam smith ’ s wealth of nations was published in 1776, the year of the birth of our nation. our market - driven economy,