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SHADOW FINANCIAL REGULATORY COMMITTEE
1999 Annual Report
Administrative Office
c/o Professor George G. Kaufman
Loyola University Chicago
820 N. Michigan Avenue
Chicago, Illinois 60611
312-915-7075
In 1999, the Shadow Financial Regulatory Committee completed its fourteenth year of operation. As in most of its previous years, the Committee met quarterly. It issued six policy statements.
The Committee experienced one change in membership during the year. Jonathan R. Macey, the J. DuPratt White Professor of Law and Director of the John M. Olin Program in Law and Economics at the Cornell Law School, resigned for personal reasons. (Current and past members of the Committee are listed in Appendix A.)
Meetings
As usual, the Committee met for two days--all day on Sundays and on Monday mornings. The 1999 meeting dates were on Sunday-Monday, February 21-22, April 25-26, September 26-27, and December 12-13. All meetings were at the offices of the American Enterprise Institute in Washington, D.C.
The February meeting was a "think-tank" session, devoted primarily to a thorough exploration of the issue of bank regulatory capital standards, particularly in light of the pending proposal by the Basel Committee on Banking Supervision to revise its capital accord. The Committee decided to prepare a long paper or monograph on its recommendations for capital standards, focusing primarily on the use of subordinated debt to increase market discipline on banks and reduce the necessity for regulatory standards and discipline. In addition, the Committee reviewed capital standard in the insurance industry and the implications of the LTCM rescue in 1998. At this meeting, the Committee did not work on policy statements nor hold a press conference. The primary purpose was allot sufficient time for "thinking" about current problems and solutions. The other three meetings were regular meetings devoted to a number of current issues on which the Committee may, after discussion, want to issue policy statements and ending with the release of such statements at a press conference. At its meetings, the Committee followed its usual practice of devoting part of the session to meeting with guests. Guests are usually representatives of policy-makers, regulatory agencies, financial services firms, and trade associations. These meetings are private, closed-door exchanges of ideas on issues of current concern to both parties.
In addition, the first joint meeting of the U.S. Shadow Committee with the new European and Japanese Shadow Regulatory Committees was held on June 13 in New York City. Much of this meeting was devoted to having the members of the Committees know each other better and to review the ongoing and planned activities of each Committee.
Policy Statements
The Committee continues to serve as a major independent public watchdog for monitoring and evaluating events affecting the efficiency and safety of the financial services industry. In 1999, the Committee focused the largest proportion of its time on rethinking bank regulatory capital standards. Other areas of attention included the changing features of the bank modernization legislation that was working its way through Congress during the year and the continued expansion of government sponsored enterprises (GSEs), in particular the Federal Home Loan Banks. Two policy statements (Nos. 154 and 156) dealt with the Committee's views on bank regulatory capital standards and evaluation of the Basel proposals. Statement 159 criticized the expansion of Federal Home Loan Bank lending to small commercial banks on small business and agriculture collateral as is included in the Bank Modernization Act. Statement 157 expressed concern over the very large relative losses associated with the recent delayed resolution of two commercial banks. The Committee will consider the regulatory agency's current practice in examining for fraud and for prompter regulatory actions in its agenda for 2000. Statement 155 encouraged Congress before its enactment of bank modernization to expand bank product powers and not tilt regulatory authority over powers unduly in favor of any one agency. Lastly, Statement 158 enumerated a number of questions that should be answered before Congress adopts federal catastrophe insurance.
The joint meeting of the three Shadow Regulatory Committees in June in New York was devoted entirely to an analysis of the Basel proposal for revisions of bank regulatory capital standards. The representatives of the three Committees agreed that the proposal did not necessarily represent an improvement over the current standards, outlined the reasons why, and discussed the use of a subordinated debt requirement to finance the role of market discipline. The group drafted a joint statement summarizing its discussion and recommendations. Because the three Committees were not fully represented, the joint statement is not an official statement. Nevertheless, it was discussed by the Committee members and released the next day on June 14 at a conference on bank capital at the Council on Foreign Relations in New York City. The joint statement is shown in Appendix D.
Dissemination and Public Service
The Committee seeks both to raise the level of debate on public policy affecting the financial services industry and to improve public policy itself largely through its policy statements and the underlying analytical reasoning. The policy statements are released at a press conference immediately following most quarterly meetings. The press conferences, which are attended by Committee members, serve two purposes. One, they provide the representatives of the media with an opportunity to obtain additional information about the statements, including background information and the underlying reasons through both an introductory briefing and asking questions directly of Committee members. Two, the conferences provide the Committee with an opportunity to educate the press on the underlying economics arguments for each statement and to assist them in formulating appropriate questions. The policy statements and the press conferences receive regular coverage in financial trade publications, such as the daily American Banker and the daily and weekly BNA Banking Reports, and occasional coverage in major national daily and weekly publications, such as the Wall Street Journal and Washington Post. In addition, segments of the press conferences and interviews with Committee members at the conferences have been broadcast on a number of TV and radio stations, including CSPAN, PBS, CNBC and CNN.
The policy statements are delivered the same day to the appropriate policy-makers, regulatory agencies, and other interested parties. To the extent that the statements pertain to specific issues and proposed regulations on which agencies have requested public comment, they are submitted to the agency. Since mid-1997, all current statements along with other information about the Committee are available on the AEI’s website shortly after the press conference (www.aei.org. click on Shadow Financial Regulatory Committee). The statements are also sent to designated members of the media that do not attend the press conference, policy-makers, regulators, and members of the general public that request to be on the mailing list. At yearend 1999, the mailing list contained more than 500 names both in the United States and abroad. In addition, a large number of requests for policy statements and other information were made by telephone and letter through the Committee’s administrative office at Loyola University. In order to both increase the audience for the policy statements further and provide a readily available historical record, in 1999 the Committee’s statements continued to be published in the quarterly Journal of Financial Services Research, a major academic and professional journal.
Both the European and Japanese Shadow Financial Regulatory Committee met throughout the year and released a number of policy statements focusing on financial regulatory safety and efficiency issue in their areas. These statements are displayed on the U.S. Shadow Committee AEI website.
Plans for 2000
The Committee will meet quarterly in 2000 on February 20-21, May 7-8, September 24-25, and December 3-4. The major immediate focus of the Committee for the year 2000 will be completion of its proposal on bank regulatory capital standards, emphasizing in particular the need to increase reliance on market discipline through use of subordinated debt as a required component of bank capital. The final draft will be completed be a small drafting committee in January and circulated to all Committee members for last minute minor modifications before a final vote at the February meeting. The report will be published as a monograph by the AEI and will be released publicly at a AEI conference, tentatively scheduled for March 2 at the AEI offices in Washington D.C. In addition, the Committee will devote attention in 2000 to improving and accelerating resolutions by regulators of bank failures, in particular failures due to fraud, and to developments in the insurance and securities areas. With the enactment of broader bank geographic and product powers, the Committee will also monitor and analyze the regulations developed to implement the provisions of legislation.
A second joint meeting of the three Shadow Committees is tentatively scheduled for Tokyo in October 2000. It will again be in conjunction with a conference on banking issues.
Administrative and Financial
The Committee is a tax-exempt 501(c)(3) nonprofit organization. The Committee’s administrative office is at Loyola University Chicago. Beginning in 1999, the Committee has been financially supported entirely by and meets at the American Enterprise Institute, but retains its policy independence.
Appendix A: Statement of Purpose and Membership
The Shadow Financial Regulatory Committee is a group of independent experts on the financial services industry and its regulatory structure.
The purpose of the Committee are: (1) to identify and analyze developing trends and ongoing events that promise to affect the efficiency and safe operation of sectors of the financial services industry, (2) to explore the spectrum of short- and long-term implications of emerging problems and policy changes, (3) to help develop appropriate private, regulatory and legislative responses to such problems, and (4) to assess and respond to proposed and actual public policy initiatives with respect to their impact on the public interest.
The results of the Committee’s deliberations are intended to increase the awareness and sensitivity of members of the financial services industry, public policy markets, the communications media and the general public to the importance and implications of current problems, events and policy initiatives affecting the industry.
Members of the Shadow Financial Regulatory Committee are drawn from academic institutions and private organizations and reflect a wide range of views. The Committee is independent of any of the members’ affiliated institutions or of sponsoring organizations. The recommendations of the Committee are its own. The only common denominators of the members are their public recognition as experts on the industry and their preferences for market solutions to problems and the minimum degree of government regulation consistent with efficiency and safety.
Past and Present Members (1986-1999)
George G. Kaufman, (1986-) | Loyola University Chicago |
Appendix B: Policy Statements
1. The Baker Plan and LDC Lending, Feb. 15, 1986 |
