Greenspan cautions on over-regulation

Alan Greenspan, the chairman of the Federal Reserve, has warned against over-regulation in financial markets despite corporate scandals such as Enron and WorldCom.

In a speech made yesterday as part of his trip to the UK to receive an honorary knighthood, the veteran central banker made remarks which ran counter to the prevailing mood that increased regulation and greater transparency are necessary to improve financial systems and lead to more stable wealth creation.

He said greater transparency could deter innovation and risk-taking if it was seen as limiting profitable opportunities. "Regulators may not always be able to differentiate easily between secrecy to protect intellectual property and secrecy to deceive or commit outright fraud," he told the Society of Business Economists. "Yet a supervisory system must make that distinction as best it can."

Mr Greenspan also suggested that the US system of regularly reviewing regulations, in order to keep the burden to a minimum, could be adopted elsewhere. He said: "Business people in the United States complain, perhaps with some exaggeration, that so many regulations are on the books that they're probably at all times unknowingly in violation of some of them. We at the Federal Reserve endeavour every five years to review all our existing regulations in order to revise or rescind those that are out of date. This schedule has worked well for us, and it is probably good practice to apply to regulatory systems generally."

Mr Greenspan admitted that "unfettered capitalism is by no means fully accepted as the optimal economic paradigm, at least as yet". But he said regulatory changes "must be kept to a minimum to avoid fostering uncertainty among innovators".

In an earlier speech at the opening of the new Treasury building in London, he paid tribute to the capital'sposition as a leading financial centre "despite the emergence of the euro" and in an era when telecommunications developments meant traders could locate anywhere.

"History, together with London's long, should I say, sterling, reputation as a place to do business, seems to have spurred market participants to trade through London," he said. He noted that in foreign exchange trading London conducts twice the volumes of New York despite the dollar's position as the most commonly traded currency.