Addressing a banking conference at the Chicago Federal Reserve Bank, Greenspan chose to stick closely to the meeting's topic, warning financial institutions that improvements in risk management tools -- such as derivatives -- should not lull them into complacency about the inherent risks of their business.
``There are undoubtedly legitimate concerns and avenues for significant improvement of risk management practices,'' Greenspan said.
He said the development of new products and services that help banks manage risks was a ``net benefit'' for the economy. However, he warned that many of those instruments had not yet been tested during times of heightened stress.
``During the recent phenomenal growth of the derivatives market, no significant downturn has occurred in the overall economy to test the resilience of derivatives markets and participants' tools for managing risks,'' he said.
``The possibility that market participants are developing a degree of complacency or a feeling that technology has inoculated them against market turbulence is admittedly disquieting. Such complacency is not justified,'' he added.
Greenspan also cautioned market participants, and in particular private investors, not to rely on the Fed to bail them out in the event of a bank failure.
``There are many that hold the misperception that some American financial institutions are too big to fail,'' he said.
While the Fed and other supervisors would try to ensure an ''orderly liquidation'' of failed institutions, Greenspan warned that ``shareholders would not be protected, and I would envision appropriate discounts or 'haircuts' for other than federally-insured liabilities''.