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Shadow Financial Regulatory Committee Statements

The Shadow Financial Regulatory Committee is comprised of experts drawn from academic institutions and private organizations who meet each quarter to identify and analyze public policy issues regarding the financial services industry. Each meeting concludes with one or more policy statements written to clarify policy issues and recommend improvements in regulatory policy. The Committee is independent and reflects a wide range of views. The Shadow Financial Committee sections include policy statements on topics such as LIBOR, Dodd-Frank, TARP, etc.

For further information about the U.S. Shadow Financial Regulatory Committee and links to the Shadow Financial Regulatory Committees in Asia, Europe, Japan and Latin America.

Asian Shadow Financial Regulatory Committee Statements (2004 - Current)

The Asian Shadow Financial Regulatory Committee (ASFRC) is a group of independent experts on economic policy issues relevant to financial markets and the financial industry of the Asia-Pacific region. ASFRC members are independent of any of the members' affiliated institutions. The policy recommendations of ASFRC are its own. Typically, ASFRC tries to translate concepts drawn from academic literature into concrete policy recommendations.

Inaugural Meeting: Financial Integration in the Asian-Pacific Region (Taipei | 12 July 12 2004)

Regional financial integration is seen as an important way to promote an efficient allocation of resources supportive of economic development and financial stability in a region. The creation of a regional bond market became a popular subject of discussion among financial policymakers after the East Asian financial crisis in 1997-1998. The abrupt reversal of capital flows over a span of several months raised questions about the wisdom of relying on short-term bank financing from outside the region, and the need to set aside a sufficient amount of foreign reserves to prevent or mitigate the adverse consequences of such sudden capital outflows. Capital outflows from the region during the crisis amounted to slightly over US$100B, equivalent to nearly 5 percent of the pre-crisis domestic savings in the five leading economies of the region. In contrast to the events during the East Asian financial crisis, as of March 2004, the total amount of foreign exchange reserves accumulated by the economies in the region exceeded $2.1 trillion. There is concern about the continuing accumulation of foreign reserves in the region because they reflect a serious trans-Pacific current account imbalance. Concern among policymakers about using these savings to advance the economic growth of countries in the region through the development of efficient primary and secondary markets has led to several Asian Bond Market Initiatives.

Implementation Issues of Revised Capital Standards for Banks in Asia (Basel II) (Hong Kong | 17 January 2005)

On June 26, 2004 the Basel Committee on Banking Supervision achieved consensus on the proposals for a new capital adequacy framework for banks to respond to deficiencies in the 1988 Capital Accord on credit risk. The proposed framework, commonly referred to as “The New Basel Capital Accord” or “Basel II”, addresses new aspects of regulation and supervision of banks, structured around three “pillars”. The first pillar deals with the minimum regulatory capital requirement and contains new rules for calculating more refined risk weights for different kinds of loans. Moreover, it suggests that capital should be held against so-called operational risk. The second pillar is the supervisory review process, which requires supervisors to ensure that each bank has sound internal processes in place to assess the adequacy of its capital based on a thorough evaluation of its risks. The third pillar aims to bolster market discipline through enhanced disclosure by banks. Although the new framework’s focus is on internationally active banks, its underlying principles are intended to be suitable for application to banks of varying levels of complexity and sophistication, including banks in Asia.

The Role of Institutional Investors in Strengthening Corporate Governance in Asia (Kuala Lumpur | 11 July 2005)

Early phases of the East Asian miracle were advanced by a corporate structure that emerged from Asian culture and institutions. In Japan, corporations were controlled within networks dominated by a main bank. Korean corporations were organized by corporate groups, each controlled by a charismatic individual with close links to an activist government. Overseas Chinese companies were controlled by families. These corporate structures ensured fast growth through long-term investment strategies that paid less attention to investor returns. The 1997- 1998 Asian financial crisis drew attention to the downside of these structures, for they left minority shareholders vulnerable to exploitation by controlling shareholders, e.g., through related party transactions including lending. The crisis was precipitated by the exit of foreign lenders frightened by the high levels of debt that resulted.

Aging and Pension: A Ticking Bomb - Joint Statement: Shadow Financial Regulatory Committees of Asia, Europe, Japan, and the United States ( Seoul | 31 October 2005)

The next fifty years will see sharp increases in the ratio of retired to working people in a number of economies: rising affluence increases life expectancy and decreases the number of children per family. For example, in some major Asia-Pacific economies, the ratio will increase from less than 1 in 5 today to about 1 in 2 in 2050.

Improvement of Governance System in the Asian Mutual Fund Industry (Honolulu | 11 January 2006)

Asians continue to save at a high rate, but hold a high proportion of their private wealth in real estate, low-return bank deposits, and common stocks mainly for short term gains. This results in considerable inefficiencies in the allocation of capital and the sharing of risk and adds to market volatility. However, the higher returns achieved recently in Asian stock markets have attracted many more savers into mutual funds/unit trusts. Recent scandals in the U.S. mutual fund industry offer valuable lessons and indicate that the Asian industry requires careful scrutiny.

Lessons from the New Zealand Model of Market-Based Financial Regulation (Auckland | 10 July 10 2006)

The New Zealand model of market-based financial regulation is widely regarded as an innovative approach to financial regulation. The underlying philosophy of this model relies on three pillars of discipline:self-discipline by banks in the management of their risks, primarily by reinforcing the role of directors in taking ultimate responsibility for the performance of banks; market discipline based on a policy of disclosure in tandem with a policy of not bailing out failed institutions; and a regulatory discipline that is focused on financial stability rather than depositor protection and implemented with adequate capital requirements and less intrusive supervisory requirements.

Regulatory Challenges Posed by Financial Conglomeration (Manila | 5 February 2007)

The financial conglomerate (FC) has become a popular form of financial business. Although they offer benefits of economies of scope and scale, they could generate potentially serious social costs. Since an FC is a financial institution, it is exposed to all the problems arising from informational asymmetry. As a business group, it is also exposed to all the problems of business groups, particularly in Asian economies with opaque ownership, weak corporate governance and inadequate legal systems. Weak regulation of FC creates regulatory arbitrage opportunities. The governments should integrate and tighten the oversight of FC activities, make ownership transparent and accountable, and limit control of FCs by non-financial companies.

A New Perspective on Global Imbalances: The Role of MNCs (Hong Kong | 5 July 2007)

The global imbalances that threaten to provoke major international trade conflicts may be a statistical artifact, arising from an outmoded accounting for international trade that ignores its present domination by multinational corporations. Regional governments should update their international accounting; the first step would be to mandate the disclosure of data on the ownership and control of multinational corporations and the terms of their transactions amongst subsidiaries.

Lessons from Recent Financial Turmoil: Joint Statement: Shadow Financial Regulatory Committees of Asia, Australia-New Zealand, Europe, Japan, Latin America, and the United States (Copenhagen | 10 September 2007)

Executive Summary It was inevitable that global imbalances would eventually require an upward correction in the price of risk. As this occurred, it was similarly inevitable that the weakest borrowers would find themselves unable to pay some of their debt obligations. In this statement the Shadow Financial Regulatory Committees of Asia, Australia-New Zealand, Europe, Japan, Latin America, and the United States identify some important weaknesses in the financial infrastructure.

Financial Globalization and its Effect on Local Markets (Jogjakarta | 12 January 2008)

Financial globalization results from opening capital markets to cross border capital flows. Institutional developments associated with financial liberalization include improvements in the system of financial regulation, such as more transparent accounting and disclosure standards, the adoption of a better macroeconomic policy regime, such as more responsible fiscal policy and an exchange rate regime compatible with more open capital accounts, improvements in the legal system such as clearer bankruptcy procedures, etc. The benefits of financial globalization include greater economic efficiency arising from the better allocation of capital, access to cheaper capital and high return savings instruments, greater liquidity, portfolio risk diversification and consumption smoothing. Many economies in Asia liberalized their financial markets beginning in the early 1990s. In contrast with the situation two decades ago, Asia today is a net exporter of capital to developed countries. Asian savings, reflected in large current account surpluses, are largely intermediated in global financial markets and then return to Asia in the form of predominantly private capital flows. Indeed, many studies point out that economies in Asia are more integrated with global financial markets than they are with regional financial markets. The extent of regional financial integration is evidently mainly due to increased regional trade integration. Asian currencies are generally experiencing appreciation relative to the US dollar. Asian economies appear to be operating in a benign environment without 2 any apparent threat of another financial crisis in the foreseeable future.

Making Sovereign Wealth Funds Mutually Beneficial (Tokyo | 7 July 2008)

Many surplus countries are setting up Sovereign Wealth Funds. Their increase in number and size, and their move into equity investments have provoked fears, not only in developing countries but also in Western countries. The solution currently proposed by the IMF is to commit the Sovereign Wealth Funds to a code of best practice. This would not address the fundamental problem: distrust of foreign powers in commercial decisions. However, the fears could be alleviated if sovereign investment were channeled via a number of competing “Mutual Wealth Funds”, each with diverse sovereign investors. Such collective investment vehicles would insulate sovereign investment from the control of any particular country.

Preventing Asset Bubbles (Xiamen | 7 May 2009)

Asian countries hold large amounts of U.S. Treasury securities. In particular, China has been increasing its credit supplies to the United States in recent years. These investments have lowered the cost of capital in the U.S. and have boosted U.S. economic growth, consumer spending and demand for residential housing. This, in turn, has led to greater demands for Asian exports and greater capital flows back into the region in the form of FDI. These investments into the U.S. Treasury securities, however, are partially driven by the lack of suitable investment products in the region. The cost of capital in the region could be lowered if we could keep these investments. The region is suffering from these investments as the asset bubble bursts in the U.S.

There was a strong call for strengthening the regional financial markets after the Asian Financial Crisis of 1997. We now reiterate that call and propose a few measures to strengthen the regional financial markets.

Greening Growth (Seoul | 20 October 2009)

Global climate change is the most pressing issue confronting sustainable development. However, global warming can be mitigated only with political commitment, technological innovation, massive investments, global financing, and international coordination. Nations must develop and coordinate effective mechanisms that confront the distinctive characteristics of green investments: widespread externalities, high uncertainty, long time horizons and exposure to government regulation.

Governance of Financial Institutions in Asia: Lessons from the Financial Crisis (Singapore | 15 July 2010)

The global financial crisis of 2008/2009 showed once again the importance of effective corporate governance, especially for large and complex financial institutions. The recent efforts to strengthen governance of these financial institutions reflect a new recognition that not only governments but also boards of directors (BoDs) of these institutions should play an active role to assist in protecting taxpayers as well as investors. The European Commission’s Green Paper of June 2010 on corporate governance in financial institutions and remuneration policies refers to the need for financial institutions taking better account of the interests of depositors, thereby implying taking better account of the interests of taxpayers at large. This is in contrast to the focus on protecting shareholders from management’s misbehaviour (US/UK model); minority shareholders from controlling owners’ misbehaviour (Asian model); and workers from management’s/shareholders’ misbehaviour (continental European model).

Managing the Impact of Hot Money through Regulatory Coordination (Bangkok | 28 - 30 November 2010)

In the aftermath of the 2008 financial turmoil,many economies, namely those in North America and Europe, were negatively affected, while emerging and East Asian economies appear to have avoided some of the effects. Stimulus packages aimed at encouraging economic growth and recovery were widely implemented, but the impact thus far has not been convincingly positive.

Capital Market Integration and Stock Exchange Consolidation in the Asia-Pacific: Joint Statement: Asian and Australia-New Zealand Shadow Financial Regulatory Committees (Queenstown | 6 April 2010)

While merger/acquisition proposals emanate from the private interests of the owners/managers of stock exchanges (and are increasingly likely given modern technological developments relevant to exchanges), there are also potential social benefits in the form of reduced transactions costs, increased liquidity etc.Some recent cross-border consolidation proposals from stock exchanges have met opposition on “national interest” grounds. These are often ill-defined and it is important to be clear what they are. To the extent that mergers have adverse implications for the level of competition in provision of exchange services, barriers to entry for new stock exchanges (either regulatory or created by incumbents) warrant examination. Consolidation of exchanges raises a number of important financial stability issues which require up-front agreement between national regulators on crisis management and resolution mechanisms.

PIGS out of the Zone: Effect on Asian Economies and Markets (Phuket | 12 July 2012)

History is replete with examples of economic and financial crises. Some of them are of significant order of magnitude that resulted in tremendous hardship on citizens. Examples of such crises are,the Great Depression of the 1930s and in more recent times,the 2007-2009 financial crisis that cost the US and Europe approximately 25 percent oftheir combined GDP. In the aftermath of a crisis, economists and policymakers analyze the event and propose reforms. However, on many occasions,the implementation of these reforms was inadequate and as a result, we are left with a certainty that the next crisis will be in the making.

The Internationalization of the RMB Challenges for East Asia (27 November 2012)

China is moving steadily to internationalize the RMB. Full convertibility is far off, because China does not wish to destabilize its own financial system, or the international system, from which it has benefitted greatly. But the procession of swap agreements that China has signed with trade partners shows that it sees economic advantages in expanding the use of the RMB for trade. A large volume of RMB is now held outside China. This statement addresses the problems that can result.

The Currency War of 2013: Will it Happen? (Shanghai | 18 April 2013)

Serious talk of a currency war resurfaced at the G7meeting in February 2013. This was followed by Japan’s announcement of a major quantitative easing (QE) package in an attempt to pull Japan out of deflation. With Japan joining the United States and the Euro zone in adopting a strategy of continuing quantitative easing, this view appeared to have some validity but any currency war, at most, is likely to be a cold one. Loose monetary policies are usually aimed at stimulating domestic demand, but their effects spill over into the realm of exchange rates. Since March 2013, the Yen has depreciated significantly against the US dollar and the Euro. Any sustained quantitative easing undertaken by the Bank of Japan could lead to competitive devaluations and reignite beggar-thy-neighbor protectionist policies, especially among the export-led economies of Asia, as well as create the potential for unstable and volatile capital flows. Both are not new issues for Asia.

Venture Capital Markets in Japan (Sapporo | 6 September 2013)

Development of the venture capital markets in Japan is seen as being an important part of the Abenomics strategy to stimulate long-term growth. According to a recent survey of investment by venture capital firms as a percentage of GDP, Japan ranked 35th out of 37 countries surveyed, well below China (11th), Korea (14th) and behind many other Asian countries. (Source: VentureXpert)

Financial Regulatory Cooperation in Asia (Tokyo | 9 May 2014)

The recent ADBI report on regional financial regulation in Asia (Kawai and Morgan, Feb. 2014) contrasts the current state of financial regulatory cooperation in Asia with that of the European Union.

The Asian Infrastructure Investment Bank: Its Role and Likely Impact (Seoul | 24 June 2015)

The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank proposed by the government of China. Its purpose is to provide finance to infrastructure projects in the Asia region. In doing so, it will compete with existing multilateral lenders in the region such as the Asian Development Bank (ADB) and to some extent the World Bank Group through its agencies such as the International Bank for Reconstruction and Development (IBRD). The Bank was proposed by China in 2013 and launched in Beijing in October 2014. In its 2015 statement, the ASFRC presents recommendations to enhance the AIIB’s potential to effectively carry out its mandate and deliver benefits to both China and countries in the region.

Funding the real economy: Are there lessons for Asia from the Australian financial regulatory experience? (Sydney | 15 July 2016)

In its 2016 statement, the ASFRC discusses lessons for Asia from the Australian financial regulatory environment.

ASEAN Bank Integration: Benefits, Risks, and Opportunities (Taipei | January 2017)

In its 2017 statement, the ASFRC stated," Banks headquartered in ASEAN have assumed a stronger regional orientation, especially in the pos tGlobal Financial Crisis (GFC) period. According to the BIS, in 2014, six years after the GFC, banks fromthe Asia-Pacific region accounted for 59 percent of exposures to the region, equivalent to USD1207.3B, compared to the exposure of euro-area banks which accounted for only 13 percent or USD269.1B. Prior to the GFC, which began in 2008, banks from within the Asia-Pacific region and the euro area had similar exposures of roughly 31 percent to the region at USD 264B and USD 263.2B,respectively. The regional bank integration process is expected to intensify in the coming years. In this statement we discuss the potential benefits, risks, and opportunities arising from ASEAN bank integration and provide policy implications and recommendations."