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George B. Kaufman, Robert E. Litan, Richard C. Aspinwall, George J. Benston, Charles W. Calomiris, Franklin R. Edwards, Scott E. Harrington, Richard J. Herring, Paul M. Horvitz, Roberta Romano, Hal S. Scott, Kenneth E. Scott & Peter J. Wallison, Reforming Bank Capital Regulation: A Proposal by the U.S. Shadow Financial Regulatory Committee (AEI Press 2000).

Abstract: This monograph is the US Shadow Financial Regulatory Committee’s critical and constructive response to the June 1999 proposal of the Basel Committee on Bank Supervision — the international body of bank supervisors from the G-10 countries plus Luxembourg and Switzerland — for reforming international bank capital standards that have been in place since 1989. The topic is an important one, as the recent waves of banking crises in both developed and developing economies have illustrated. Demonstrating that the Basel standards have been a distorting and, on the whole, an ineffectual means of linking minimum capital requirements to bank risk, the authors propose a different approach that focuses on market discipline for large banks to supplement regulatory discipline, as well as to ensure that capital standards are credibly enforced. The centerpiece of the Shadow Financial Regulatory Committee’s proposal is a new subordinated-debt requirement, which, along with complementary reforms, would bring market forces to bear in measuring bank risk and rewarding proper bank risk management. That proposal would provide new information to supervisors and regulators, make the supervisory and regulatory process more effective and accountable, and create a reliable independent mechanism for disciplining bank behavior.