Addressing Systemic Risk
Remarks by Alan Greenspan

On June 3, 2009, former Fed chairman Alan Greenspan spoke at an AEI conference on systemic risk. Participants discussed the pros and cons of Treasury Secretary Timothy Geithner's plan to create a systemic risk regulator for the financial system. Mr. Greenspan's full remarks as prepared for delivery are available here as an Adobe Acrobat PDF.

Risk of system-wide breakdown is an unavoidable characteristic of market economies. So long as there is a division of labor and, hence, private trading counterparties, the possibility of systemic failure cannot be eliminated. Financial institutions that require significant leverage to yield an adequate rate of return on equity are especially prone to a disabling "run on the bank." A depository institution depends on investors' willingness to hold its liabilities, knowing full well that if all lenders attempted to withdraw their monies at the same time, the bank or thrift would fail.

Only an institution whose assets are overnight riskless Treasury bills or their equivalent can consistently fend off failure. But no private institution could fund that portfolio, except at a loss. Thus, financial institutions, to profit, must hold portfolios of risky assets in order to obtain a rate of return in excess of private borrowing costs. And for such institutions to be consistently profitable, their portfolio must be successfully diversified.

Banking has always been a game of inducing depositors, or in earlier centuries note holders, to fund bank assets. In the 1840s, for example, U.S. commercial banks had to maintain a capital buffer in excess of 50% of assets in order to create willing holders of their notes. In modern times, this necessary capital buffer has dwindled, reflecting improved information availability and the existence of various government safety nets. However, even with deposit insurance and activist monetary authorities, many banks and other financial intermediaries, have failed, sometimes with disastrous systemic consequences.

Click here to read the full text of this speech as an Adobe Acrobat PDF.

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Wednesday, April 23, 2014 | 12:00 p.m. – 1:30 p.m.
Graduation day: How dads’ involvement impacts higher education success

Join a diverse group of panelists — including sociologists, education experts, and students — for a discussion of how public policy and culture can help families lay a firmer foundation for their children’s educational success, and of how the effects of paternal involvement vary by socioeconomic background.

Thursday, April 24, 2014 | 12:00 p.m. – 1:30 p.m.
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This event will coincide with the release of a new report by AEI’s Mary Habeck, which analyzes why current national security policy is failing to stop the advancement of al Qaeda and its affiliates and what the US can do to develop a successful strategy to defeat this enemy.

Friday, April 25, 2014 | 9:15 a.m. – 1:15 p.m.
Obamacare’s rocky start and uncertain future

During this event, experts with many different views on the ACA will offer their predictions for the future.   

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