Mr Alan Greenspan said yesterday that regulatory responses following the recent wave of US corporate and financial scandals could cause "collateral damage" by discouraging executives from taking risks.

In a satellite address to a conference at the Atlanta Federal Reserve, the Federal Reserve chairman traced the transition from self-policing arrangements based on trust in the 19th century to more regulated financial markets.

A market economy required formal rules, such as codes of shareholder rights and a contract law, and corporate malfeasance should be "expeditiously punished", he said.

But "rewriting rules that have served us well is fraught with the possibility for collateral damage", the Fed chairman said.

From the collapse of Enron and WorldCom to the mutual fund industry scandal, there have been repeated calls for new legislation to protect investors.

In 2002, the US Congress approved the Sarbanes-Oxley act, which among other measures includes the requirement that chief executives take personal responsibility for their company's accounting practices.

Mr Greenspan has warned in the past that new legislation - and the indictment of executives - may have discouraged US executives from taking on risky investment projects, and forced them to spend too much time with their lawyers.

"We need to be careful not to undermine the paradigm that has so effectively governed voluntary trade," Mr Greenspan said.

After a run of stronger data releases, including solid job growth and a jump in inflation in March, the University of Michigan reported yesterday that its survey of consumer sentiment in the US fell this month.

The preliminary April reading of the survey showed that the main index slipped to 93.2 from 95.8, disappointing forecasts of a pick-up to 96.5.

Both the current conditions and expectations components slipped.