Greenspan: Banking Competition Remains Intense

WASHINGTON – Even though the country has just half the banks that it did two decades ago, the competition to provide consumers with financial services remains intense, Federal Reserve (search) Chairman Alan Greenspan (search) said Friday.

Speaking to a Federal Reserve sponsored conference, Greenspan said that deregulation of the U.S. banking industry (search) has contributed to an approximately 50 percent decline in the number of banks and savings and loan institutions since the mid-1980s.

At the same time, he said, the 10 largest U.S. banks and thrift institutions have increased their share of domestic assets such as consumer loans from 29 percent of the total to 49 percent.

But Greenspan said most studies show that this ongoing consolidation has not reduced overall competition to provide consumers with banking services.

"Even in the face of consolidation, competition is fought on the battlefield of the local market, where most households obtain the majority of their banking services," Greenspan said in his prepared remarks. "It is noteworthy that our measures of local market competition have remained quite stable over the past 15 years."

Greenspan said that competition is being bolstered by the fact that deregulation has spurred many nonbank enterprises to provide loans and other services that were once mainly offered by traditional banks.

Technology has also helped to boost competition, the Fed chief said, with more sophisticated computer programs allowing banks to offer loans to applicants who were once turned down for mortgages and other loans.

"Where once more-marginal applicants would simply have been denied credit, lenders now are able to quite effectively judge the risk posed by individual applicants and to price that risk effectively," Greenspan said.

Because of this, he said that sub-prime mortgage lending, which accounted for just 1 or 2 percent of total home mortgages (search) in the early 1990s, now accounts for roughly 10 percent of the number of mortgages outstanding.

"Unquestionably, innovation and deregulation have vastly expanded credit availability to virtually all income classes," Greenspan said. "Access to credit has enabled families to purchase homes, deal with emergencies and obtain goods and services."

Greenspan noted that home ownership is now at a record high and the number of home mortgage loans going to low and moderate income families has risen rapidly over the past five years.

The Federal Reserve since last June has been gradually raising interest rates in an effort to make sure the rebounding economy does not unleash unwanted inflation. Greenspan made no comments in his speech about the outlook for the economy or interest rates.