idorfman.com
WASHINGTON (Dow Jones)--Federal Reserve Chairman Alan Greenspan said Friday that innovations in consumer finance has made credit easily available to a "broader spectrum" of U.S. consumers, but those advances have also intensified the need for financial savvy among consumers.
"Unquestionably, innovation and deregulation have vastly expanded credit availability to virtually all income classes," Greenspan said in prepared remarks at a conference on consumer finance. "The more credit availability expands, however, the more important financial education becomes," he said, asserting that for some consumers "this reliance on technology has been disconcerting."
In his remarks, Greenspan did not discuss the state of the U.S. economy or the outlook for monetary policy. The Fed has raised its key Federal funds rate seven times since June 2004, nearly tripling it to 2.75%. Wall Street widely expects the central bank to raise the rate to 3% next month and to continue raising it for the remainder of the year.
Greenspan said new finance techiques and new financial instruments have allowed people who at an earlier time would have been denied credit to obtain it. He said sub-prime mortgages, provided to borrowers with less-than-top-notch credit histories, now account for "roughly 10% of the number of all mortgages outstanding," up from no more than 2% in the early 1990s.
"Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately," he said.
Competition among consumer financial-service providers has remained intense despite the consolidation of the U.S. banking industry over the last decade, Greenspan said. Since 1995, the 10 largest U.S. banking and thrift organizations have boosted their share of domestic financial assets from 29% to 48%. But "this ongoing consolidation of the U.S. banking system has not reduced overall competitiveness for consumer financial services," he said.
Still, Greenspan said, some innovations have been befuddling for consumers. He cited "credit-scoring" formulas developed to assess the likelihood of a borrower repaying his debt on time. "Consumer advocates have raised concerns about the transparency and completeness of the information fit to the algorithm, as well as the rigidity of the types of data used to render credit decisions," he said.
Those weaknesses, according to critics, can cause consumers who have little or no credit history to be denied credit, Greenspan said. Still, he said, financial firms are developing techniques to resolve those problems.
"In this increasingly competitive and complex financial-services market, it is essential that consumers acquire the knowledge that will enable them to evaluate products and services from competing providers and determine which best meet their long- and short-term needs," Greenspan said. |
