U.S. SHADOW FINANCIAL REGULATORY COMMITTEE

2000 Annual Report

Administrative Office

c/o Professor George G. Kaufman
Loyola University Chicago
820 N. Michigan Avenue
Chicago, Illinois 60611
312-915-7075

In 2000, the U.S. Shadow Financial Regulatory Committee completed its fifteenth year of operation. As in most of its previous years, the Committee met quarterly. It issued eight policy statements. The Committee experienced one change in membership during the year. Roberta Romano, Allen Duffy/Class of 1960 Professor of Law at the Yale Law School, joined the Committee. (Current and past members of the Committee are listed in Appendix A.)

A Latin American Shadow Financial Regulatory Committee was organized during the year and held its first meeting in December in Sao Paulo, Brazil. This Committee joins the other two new committees--the European and Japanese Shadow Committees--which were both organized in 1998. All four committees operate independently, but keep each other informed of their activities and plan to meet jointly once a year. The membership and activities of all the committees are posted on the U.S. Committee’s website--www.aei.org/shdw/shdw.htm.

As usual, the Committee met quarterly for two days--all day on Sundays and on Monday mornings. The 2000 meeting dates were on Sunday-Monday, February 20-21, May 7-8, September 24-25 and December 3-4. 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 a number of issues, including the congressionally mandated Meltzer Report on the restructuring and future of the IMF and World Bank (on which committee member Calomiris was a member) and the current state of OTC securities regulation/deregulation. As at all of these meetings, no policy statements were issued nor press conferences scheduled. The primary purpose was to 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 second joint meeting of the U.S. Shadow Committee and the European and Japanese Shadow Regulatory Committees was held on October 15-16 in Tokyo on the topic of "Enhancing Market Discipline in Different Parts of the World." Some dozen members of the three Committees attended. The meeting was followed by a public conference on the Future of Financial Regulation.

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. The primary means of disseminating its views on these issues is through policy statements adopted at its meetings after thorough discussion. A listing of all policy statements since its establishment in 1986 appears in Appendix B. The Committee has issued 167 policy statements.

In 2000, the major policy project undertaken by the Committee was the completion and publication of the proposal for optimal bank capital regulation, which was begun in 1999. This project was partially in response to the request of the Basel Committee on Banking Supervision for public comment on its proposed changes in bank capital standards. However, the Committee’s report--policy statement number 160 and published by the AEI in a monograph entitled Reforming Bank Capital Regulation (March 2, 2000)--is broader than only a response to the Basel Committee and develops a complete framework for reforming bank capital regulation. The proposal centers on shifting the focus of regulation strongly from regulatory agencies to the market place through increasing reliance on signals obtained from subordinated debt issuance and market prices. The report was submitted to the Basel Committee and received wide circulation.

The other seven policy statements focused on increasing market discipline in U.S. financial markets, decreasing regulatory interference with efficient financial market operations, constraining government safety-net guarantees, and recommendations to the new president and congress on moving ahead on the unfinished financial services agenda. Statement 161 argued that the Comptroller of the Currency is disadvantaged by being required to explicitly charge for examinations of national banks, a service provided free of charge by the Federal Reserve and FDIC for their respective supervised state chartered banks. The Committee warned that the resulting competitive pressures could lead to bad regulation that could decrease bank stability. Shortly thereafter, in statement 167, the Committee criticized the Comptroller’s pilot project increasing the permissible limits on some loans to one borrower for well-capitalized and well-managed small banks, which it believed resulted from the competition to retain members. The Committee noted that lack of diversification was one of the major reasons for the large number of failures in the 1980s. Statement 162 opposed increases in insurance coverage on deposit accounts and statement 165 examined a number of options for deposit insurance reform developed by the FDIC. Statement 163 formulated recommendations for deregulating OTC and exchange traded derivative instruments, particularly for sophisticated investors, and statement 164 revisits the ongoing problem caused by the rapid growth of perceived government guarantees underlying the housing government sponsored enterprises (GSEs). The Committee concludes that these problems can best be solved by truly privatizing these entities. Lastly, statement 166 is an open letter traditionally sent to every incoming administration outlining the agenda the Committee believes will enhance safety and efficiency in financial institutions and markets.

In October, representatives of the European, Japanese, and U.S. Shadow Committees issued their second joint policy statement "Reform of Bank Regulation and Its Application to Japan."

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 in the past been broadcast on a number of TV and radio stations, including CSPAN, PBS, CNBC and CNN. A press conference also followed the joint meeting of the three Shadow Committees in Tokyo.

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/shdw/shdw.htm) and in 2000 all past statements were also incorporated. The policy 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 2000, 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.

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 available on the U.S. Shadow Committee AEI website.

The Committee will meet quarterly in 2001 on Sunday-Monday February 25-26, May 6-7, September 23-24, and December 2-3. The major focus of the Committee is likely to be on both continuing the drive for efficient bank capital regulation and continuing the deregulation of financial markets without destabilizing the system.

The third joint meeting of the four Shadow Committees is tentatively scheduled for Amsterdam in June 2001. It will again be in conjunction with a conference on banking issues.

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.

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.

George G. Kaufman, Co-Chair (1986-) Loyola University Chicago
Robert E. Litan, (1996-), Co-Chair (1998-) Brookings Institution
Richard Aspinwall (1986-) Chase Manhattan Bank (retired)
George J. Benston (1986-) Emory University
Charles Calomiris (1998-) Columbia University
Lawrence Connell (Co-Chair, 1986-98) Attorney at Law
Neil A. Doherty (1997-98) University of Pennsylvania
Franklin Edwards (1986-) Columbia University
Robert A. Eisenbeis (1986-1996) University of North Carolina
Wendy Lee Gramm (1994) University of Texas at Arlington
Scott E. Harrington (1998-) University of South Carolina
John D. Hawke (1986-1995) Arnold & Porter
Richard J. Herring (1990-) University of Pennsylvania
Paul M. Horvitz (1986-) University of Houston
Edward J. Kane (1986-1996) Boston College
Jonathan R. Macey (1998-1999) Cornell Law School
Robert W. Mehle (1986-1993) Attorney at Law
Allan H. Meltzer (1986-1990) Carnegie-Mellon University
Franco Modigliani (1992-98) Massachusetts Institute of Technology
Roberta Romano (2000-) Yale Law School
Hal S. Scott (1998-) Harvard Law School
Kenneth E. Scott (1986-) Stanford Law School
Peter J. Wallison (1995-) American Enterprise Institute