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WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan Wednesday urged Congress to curb the rapid growth of Fannie Mae and Freddie Mac, saying this was vital to cut the risks the mortgage finance giants pose to the nation's financial system.
In testimony prepared for delivery to the Senate Banking Committee, Greenspan said stiffer regulation alone was not enough to ease, and could actually worsen, the risks the two government-sponsored enterprises (GSEs) pose.
"World-class regulation, by itself, may not be sufficient and, indeed, might even worsen the potential for systemic risk if market participants inferred from such regulation that the government would be more likely to back GSE debt in the event of financial stress," Greenspan said.
"This is the heart of a dilemma in designing regulation for GSEs."
But he proposed a solution.
"We at the Federal Reserve believe this dilemma would be resolved by placing limits on the GSEs' portfolios of assets, perhaps as a share of single-family home mortgages outstanding or some other variation of such a ratio," the Fed chief said.
Together, the portfolios of both companies amount to some $1.5 trillion. Greenspan previously has proposed that those portfolios be cut to $200 billion for each company.
Shares of Fannie Mae (up $0.70 to $52.98, Research) and Freddie Mac (up $0.74 to $62.50, Research) both rose in morning New York Stock trading
WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan Wednesday urged Congress to curb the rapid growth of Fannie Mae and Freddie Mac, saying this was vital to cut the risks the mortgage finance giants pose to the nation's financial system.
In testimony prepared for delivery to the Senate Banking Committee, Greenspan said stiffer regulation alone was not enough to ease, and could actually worsen, the risks the two government-sponsored enterprises (GSEs) pose.
"World-class regulation, by itself, may not be sufficient and, indeed, might even worsen the potential for systemic risk if market participants inferred from such regulation that the government would be more likely to back GSE debt in the event of financial stress," Greenspan said.
"This is the heart of a dilemma in designing regulation for GSEs."
But he proposed a solution.
"We at the Federal Reserve believe this dilemma would be resolved by placing limits on the GSEs' portfolios of assets, perhaps as a share of single-family home mortgages outstanding or some other variation of such a ratio," the Fed chief said.
Together, the portfolios of both companies amount to some $1.5 trillion. Greenspan previously has proposed that those portfolios be cut to $200 billion for each company.
Shares of Fannie Mae (up $0.70 to $52.98, Research) and Freddie Mac (up $0.74 to $62.50, Research) both rose in morning New York Stock trading
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