AEI - 1999 Annual Report

1999 Annual Report

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-)
Robert E. Litan, (1996-03)
Richard J. Herring (1990-)
Richard Aspinwall (1986-01)
George J. Benston (1986-)
Marshall Blume (2002-)
Charles Calomiris (1998-)
Lawrence Connell (1986-98)
Kenneth Dam (2003-)
Neil A. Doherty (1997-98)
Franklin Edwards (1986-)
Robert A. Eisenbeis (1986-96)
Wendy Lee Gramm (1994)
Scott E. Harrington (1998-)
John D. Hawke (1986-95)
Paul M. Horvitz (1986-)
Edward J. Kane (1986-96)
Randall S. Kroszner (2003-)
Kenneth M. Lehn (2003-)
Jonathan R. Macey (1998-99)
Robert W. Mehle (1986-93)
Allan H. Meltzer (1986-90)
Franco Modigliani (1992-98)
Roberta Romano (2000-01)
Hal S. Scott (1998-)
Kenneth E. Scott (1986-)
Peter J. Wallison (1995-)

Loyola University Chicago
Brookings Institution
University of Pennsylvania
Chase Manhattan Bank (retired)
Emory University
University of Pennsylvania
Columbia University
Attorney at Law
University of Chicago
University of Pennsylvania
Columbia University
University of North Carolina
University of Texas at Arlington
University of South Carolina
Arnold & Porter
University of Houston
Boston College
University of Chicago
University of Pittsburgh
Cornell Law School
Attorney at Law
Carnegie-Mellon University
Massachusetts Institute of Technology
Yale Law School
Harvard Law School
Stanford Law School
American Enterprise Institute

Appendix B: Policy Statements

1. The Baker Plan and LDC Lending, Feb. 15, 1986
2. Aid to Failing Banks, Feb. 14, 1986
3. Federal Reserve Ruling on Junk Bonds, Feb. 14, 1986
4. Disclosure of Supervisory Actions Examiners' Ratings, June 9, 1986
5. Disclosure by Regulated Financial Institutions, June 9, 1992
6. Proposals for Risk-Related Bank Capital Guidelines, June 9, 1986
7. Capital Forbearance Policy for Agricultural and Energy Banks, June 9, 1986
8. Recapitalizing FSLIC and Zombie S&L's, June 9, 1986
9. Proposal to Facilitate the Interstate Takeover of Failing Depository Institutions, June 9, 1986
10. Federal Home Loan Bank Board (FHLBB) Proposed Rules on Regulatory Capital and Nationwide Lending by Insured Savings and Loan Associations, Aug. 5, 1986
11. Federal Regulation of Activities of State Chartered Financial Institutions, Nov. 17, 1986
12. Conversion of S&Ls from FSLIC to FDIC Insurance Coverage, Nov. 17, 1986
13. Current Bank Holding Company Applications for Increased Securities Activities, Nov. 17, 1986
14. Policies Toward Troubled Depository Institutions, Nov. 17, 1986
15. Proper Financing of Private Party Securities Fully Guaranteed by the Federal Government, Dec. 1, 1986
16. FSLIC Recapitalization, Feb. 9, 1987
17. The Federal Reserve Board's "Source-of-Strength" Policy, May 18, 1987
18. Regulatory Proposals for Risk-Related Capital Standards (Rev.), May 18, 1987
19. Supplementary Statement: Regulatory Proposals for Risk-Related Capital Standards, May 18, 1987
20. Unnecessary Costs of FSLIC Recapitalization Program, Sept. 14, 1987
21. International Debt, Nov. 13, 1987
22. FSLIC Handling of Insolvent Thrift Institutions, Nov. 13, 1987
23. Brady Commissions and Recent Market Events, Nov. 13, 1987
24. The Federal Reserve Board's Request for Comment on the Acquisition of Healthy Thrift Institutions by Bank Holding Companies, Nov. 13, 1987
25. Moratorium on Bank Securities Activities, Feb. 8, 1988
26. Studies of the Stock Market Crash, Feb. 8, 1988
27. Disposal of FDIC Equity Interests in Assisted Banks, Feb. 8, 1988
28. The Southwest Plan for Ailing Thrift Institutions, Feb. 8, 1988
29. Regulatory Proposal for Risk-Related Capital Standards, Feb. 8, 1988
30. Disclosure by Financial Institutions of Financial Assets and Liabilities, Feb. 8, 1988
31. FDIC's New Policy on "Whole Bank" Takeovers, May 16, 1988
32. Proposed FDIC Policy Statements Encouraging Independent Outside Audits of Banks, May 16, 1988
33. Policy Responses to the Stock Market Crash, May 16, 1988
34. FSLIC's Handling of Failed Thrifts, May 16, 1988
35. Need to Make FSLIC and FDIC Assistance Deals Accountable, Sept. 25, 1988
36. The Need to Estimate the True Economic Condition of the FDIC, Dec. 5, 1988
37. Assessing FDIC Premiums Against U.S. Banks' Unsubordinated Debt and Deposits in Foreign Branch Offices, Dec. 5, 1988
38. An Outline of a Program for Deposit Insurance Reform, Dec. 5, 1988
39. The Administration's Plan to Resolve the Thrift Crisis, Feb. 13. 1989
40. Risk-Based Capital and Early Intervention Proposal of Federal Home Loan Bank Board, Feb. 13, 1989
41. An Outline of a Program for Deposit Insurance and Regulatory Reform (Revision of No. 38), Feb. 13, 1989
42. The On-Budget Status of Expenditures to Resolve Thrift Insolvencies, May 15, 1989
43. Financial Institutions Reform, Recovery and Enforcement Act of 1989, May 15 1989
44. The Comptroller of the Currency's Proposal for a Minimum Bank Leverage Ratio, Sept. 18, 1989
45. Federal Reserve Proposal to Modify the Payments System Risk Reduction Programs, Sept. 18, 1989
46. Proposals to Modify Loan Loss Reserves for Third World Debt, Sept. 18, 1989
47. Congressionally-Mandated Accounting for Junk Bond Sales, Sept. 18, 1989
48. The Activities of the Resolution Trust Corporation, Dec. 4, 1989
49. Latin American Debt, Dec. 4, 1989
50. Capital Standards for Member Banks*, Dec. 4, 1989
51. Proposal to Curb Stock Market Volatility, Dec. 4, 1989
52. The FDIC's Proposed Regulation on Purchased Mortgage Servicing Rights, Feb. 26, 1990
53. Subsidized Federal Reserve Assistance, Feb. 26, 1990
54. The Failure of the Treasury's Study of the Federal Deposit Insurance System to Focus on Identifying and Correcting Defects in Government Incentives, Feb. 26, 1990
55. RTC Thrift Resolution Policies, May 7, 1990
56. The Elimination of Restrictions on Bank Securities Activities and Affiliations, May 7, 1990
57. Proposals to Consolidate the SEC and CFTC, May 7, 1990
58. Provision of Seller Financing by RTC in Asset Sales, Sept. 24, 1990
59. Condition of the Bank Insurance Fund, Sept. 24, 1990
60. RTC Property Disposition Policies, Sept. 24, 1990
61. Limiting Taxpayer Loss Exposure in Government-Sponsored Credit Enterprises, Sept. 24, 1990
62. Congressional Intercession with the Financial Regulatory Agencies, Dec. 10, 1990
63. National Branching, Dec. 10, 1990
64. FDIC Ownership of Continental Illinois Stock, Dec. 10, 1990
65. Treasury's Deposit Insurance Reform Recommendations, Feb. 11, 1991
66. Proposals to Inject Additional Funds into the Bank Insurance Fund, Feb. 11, 1991
67. Concerns About the Availability of Bank Credit, Feb. 11, 1991
68. OTS Proposal for Capital Requirement for Interest Rate Risk, Feb. 11, 1991
69. FASB's Proposed Statement of Financial Accounting Standards Concerning "Disclosures About Market Value of Financial Instruments", Feb. 11, 1991
70. Funding of the BIF and Depository Insurance Reform Proposals in H.R. 2094, May 20, 1991
71. Need to Develop a Satisfactory Data Base With Which to Analyze the Economic Condition of Insurance Companies ,May 20, 1991
72. OMB & CBO Statements Calling for More Informative Accounting & Budgeting for Deposit Insurance, Sept. 16, 1991
73. Additional Comments of Deposit Insurance Reform Legislation, Sept. 16, 1991
74. Bank of Credit & Commerce International, Sept. 16, 1991
75. Protecting Taxpayers from Risks of Government Sponsored Enterprises, Sept. 16, 1991
76. FDIC Improvement Act of 1991, Dec. 16, 1991
77. Accounting for Taxpayers' Stake in the FDIC's Bank Insurance Fund, Dec. 16, 1991
78. United States Listing Requirements for Foreign Companies, Dec. 16, 1991
79. Interagency Policy Statement on Commercial Real Estate Loans, Dec. 16, 1991
80. FDIC's Program for "Hospitalizing Sick Banks", Feb. 17, 1992
81. Using Risk-Related Capital Standards to Promote Housing, Feb. 17, 1992
82. Need to Regulate Interest Rate Risk, Feb. 17, 1992
83. The FDIC's Proposed Schedule of Risk-Sensitive Premiums, June 1, 1992
84. Brokered Deposits and Capital Requirements, June 1, 1992
85. The TDPOB's Proposed Early Resolution/Assisted Merger Program, June 1, 1992
86. SEC Listing Requirements for Foreign Securities, June 1, 1992
87. Rule Proposed by Bank Regulators to Control Interest Rate Risk, Sept. 14, 1992
88. Proposed Rule on Interbank Exposure, Sept. 14, 1992
89. Standards for Safety and Soundness, Sept. 14, 1992
90. An Open Letter to President Clinton, Dec. 14,1992
91. Proposed Changes in the FDIC's Risk-Related Premium System, March 1, 1993
92. FDIC Action on Critically Undercapitalized Banks, March 1, 1993
93. Taxpayer Risks in the Pension Benefit Guarantee System, March 1, 1993
94. The Policy of Authorizing "Minimal Documentation" Loans, May 24, 1993
95. "Fair Value" Reporting for Insured Depository Institutions Required Under FDICIA, May 24, 1993
96. Modifying Risk-Based Capital Standards to Account for Interest-Rate Risk, May 24, 1993
97. FDIC Pilot Reinsurance Program, May 24, 1993
98. The New Depositor Preference Legislation, Sept. 20, 1993
99. Proposals to Permit Banks to Branch on an Interstate Basis, Sept. 20, 1993
100. The Proposed Federal Banking Commission, Dec. 13, 1993
101. Safety and Soundness Standards, Dec. 13, 1993
102. Deterioration in the Financial Condition of the Pension Benefit Guarantee Corporation, Dec. 13, 1993
103. Principles of Regulatory Restructuring, Feb. 14, 1994
104. Mutual to Stock Conversions of Thrift Institutions, Feb. 14, 1994
105. Proposed Revisions to Community Reinvestment Regulations, Feb. 14, 1994
106. Proposed Lengthening of Examination Schedules and Required Independent
Audits for Thrift Institutions, May 23, 1994
107. Federal Displacement of State Laws: Fair Credit Reporting and Interstate Branching, May 23, 1994
108. Proposed Increases in FHA Insurance Limits, May 23, 1994
109. Financial Accounting Standard 115, May 23, 1994
110. Final Rules on Incorporating Concentrations of Credit Risks Into Risk-Based Capital Standards, Sept. 26, 1994
111. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Sept. 26, 1994
112. Regulatory Agency Measurement of Bank Capital for Prompt Corrective Action, Dec. 12, 1994
113. Proposed Community Reinvestment Act Regulations, Dec. 12, 1994
114. FDIC Insurance Assessments, Dec. 12, 1994
115. Repeal of the Bank Holding Company Act and Restrictions on Product Diversification for Banking Organizations, Dec. 12, 1994
116. Open Letter on Financial Reform to the Senate and House Banking Committees, Feb. 13, 1995
117. Emergency Assistance for Mexico, Feb. 13, 1995
118. Principles of Bank Reform: Guidelines for Assessing Pending Legislative Proposals, May 22, 1995
119. Wholesale Banking Proposal Under H.R. 1062, May 22, 1995
120. The Leach Bill, May 22, 1995
121. Proposed Amendments to Part 5 of the Regulations of the Office of the
Comptroller of the Currency, May 22, 1995
122. Federal Reserve Proposal for Pricing Daylight Overdrafts, May 22, 1995
123. Alternatives to Recapitalizing the Savings Association Insurance Fund, May 22, 1995
124. The Banking Agencies' Proposed Interest Rate Risk Capital Standards, September 18, 1995
125. Alternatives to Recapitalizing the Savings Association Insurance Fund and
Defeasing the FICO Bonds, September 18, 1995
126. Values of Bank Capital Tripwires for Prompt Corrective Action and Least
Cost Resolution, December 11, 1995
127. Reduction in Premiums for BIF-Insured Institutions, December 11, 1995
128. Bank Merger Law and Policy, December 11, 1995
129. Ownership of Stock by Bank Directors, December 11, 1995
130. Expansion of Bank Powers by Regulation, February 12, 1996
131. Extending the Credit Reform Act to GSEs, February 12, 1996
132. Disclosure of Examination Reports and Ratings, May 6, 1996
133. Proposed Legislation on Enterprise Resource Banks (The "Baker Bill," H.R. 3167), May 6, 1996
134. A Proposal for Privatization of the Federal Home Loan Bank System, May 6, 1996
135. An Open Letter to President Clinton on Financial Reform, December 9, 1996
136. Recent Fed and OCC Rulings on Permissible Bank Activities, December 9, 1996
137. Bank Activities and the Extension of Bank Subsidies, May 5, 1997
138. Restrictions on Banking-Commerce Affiliations, May 5, 1997
139. H.R. 10 ("Leach Bill") and the Commerce Subcommittee Draft,. September 22, 1997
140. Mortgage Lending by Federal Home Loan Banks, September 22, 1997
141. Strategic Plans of Federal Financial Institution Regulatory Agencies, December 7, 1997
142. Congress and Financial Reform, December 7, 1997
143. Sweep Accounts and the Prohibition on Paying Interest on Reserve, December 7, 1997 Balances and Demand Deposits.
144. Expanded Powers for Federal Home Loan Banks, May 4, 1998
145. International Monetary Fund Assistance and International Crises, May 4, 1998
146. The Credit Union Membership Access Act, H.R. 1151, May 4, 1998
147. Mergers and Acquisitions in the Banking Industry, May 4, 1998
148. Principles for Reforming the "Global Financial Architecture", September 28, 1998
149. The Use of Private Credit Ratings for Determining Capital Requirments, September 28, 1998 for Securitizations
150. The Senate vs. Version of H.R. 10, September 28, 1998
151. The Issues Posed by the Near-Collapse of Long-Term Capital Management, September 28, 1998
152. The G-7's New Precautionary Credit Line Facility for the IMF and Its Use in Brazil, December 7, 1998
153. The Federal Reserve Board and Prudential Supervision, December 7, 1998
154. Revising the Basle Capital Standards, April 26, 1999
155. The Latest Round of Bills on Financial modernization, April 26, 1999
156. The Basel Committee's New Capital Adequacy Framework, September 27, 1999
157. The Failures of BestBank and First National Bank of Keystone, September 27, 1999
158. Proposed Federal Catastrophe Reinsurance, December 13, 1999
159. Federal Home Loan Banks, December 13, 1999