Economic Review
Third Quarter 2003 

Should More Supervisory Information Be Publicly Disclosed?
By Thomas M. Hoenig

Within our financial system, a bank’s prospects and viability depend on its ability to attract investors and customers. This fundamental need means that banks and bank management must operate under the framework of market discipline and in a manner that meets the dictates of market participants. In other words, market discipline serves as the principal force influencing the performance of our financial markets.

In a speech given at the Federal Reserve Bank of Chicago’s Annual Conference on Bank Structure and Competition, Mr. Hoenig explored how the financial revolution we are now experiencing is clearly increasing the importance of market discipline in banking. Most notably, the removal of many traditional bank regulatory restraints and controls over the past few decades is expanding the role of the marketplace in allocating financial resources, encouraging innovation, and exerting discipline over banks.

However, as the importance of market discipline is increasing, an essential prerequisite for effective market discipline–timely and accurate information to guide market participants–is becoming more difficult to achieve, even with the many advances we are making in processing and analyzing financial data. Consequently, a critical goal for us to explore is how to enhance market discipline by providing market participants with adequate, timely, and accurate information for making decisions. Mr. Hoenig’s comments focus on what bank supervisors might be able to do to improve market access to information on banking organizations and to thereby enhance financial market discipline.

U.S. Urban Decline and Growth, 1950 to 2000
By Jordan Rappaport

Following World War II, many large U.S. cities began to rapidly lose population. This urban decline climaxed during the 1970s when New York City, Boston, Chicago, Minneapolis, and Atlanta each lost more than 10 percent of their population. The sharp declines of these and numerous other U.S. urban municipalities led many to believe that large U.S. cities were dying.

Then, during the 1980s, New York and Boston began to grow again. In the 1990s, so did Chicago, Atlanta, and Minneapolis. The reversal of population declines by these and a few other U.S. urban municipalities has led many to believe that large U.S. cities were coming back.

Rappaport explains why, contrary to such perceptions, recent U.S. history has not been characterized by a period of pervasive urban decline followed by a widespread urban renaissance. To be sure, a few large cities were able to successfully reverse steep population declines. But over the past 50 years, most large U.S. cities either declined continuously or else grew continuously. Such varied growth experiences resulted from a complex combination of national, regional, metropolitan area, and local factors. These included a continuing shift of population from the Northeast and Midwest to the South and West, a slowing shift of population from cities to suburbs, and the much more rapid growth of some metropolitan areas relative to others.

Travel and Tourism: An Overlooked Industry in the U.S. and Tenth District
By Chad Wilkerson

With the onset of recession in early 2001, the U.S. travel and tourism industry fell into its worst slump since World War II. The September 11 terrorist attacks and subsequent tightening of airport restrictions dealt the industry an unprecedented blow. Many travel destinations continued to suffer in 2002 and early 2003 from a declining stock market, sluggish economic recovery, and war in Iraq. Prior to these recent difficulties, however, travel and tourism’s role in the national economy had been rising steadily for decades.

As in the nation, the travel and tourism industry has become increasingly important in the Tenth Federal Reserve District. Indeed, by the late 1990s, the industry contributed more to gross output in the district than either agriculture or oil and gas extraction, the region’s defining industries for much of the 20th century. Travel and tourism is especially important in the district’s Rocky Mountain states, which are home to popular vacation spots like Yellowstone National Park, Santa Fe, and the Colorado ski resorts, as well as Denver, a top business travel destination.

Wilkerson compares and contrasts travel activity in the nation and Tenth District. He shows that national travel and tourism activity generally grows rapidly during economic expansions but slows during recessions. In the district, the effect of recessions on the industry is much less than in the nation, due largely to the different types of travelers the region attracts. At the same time, many travel destinations in the district are susceptible to other types of shocks, such as wildfires or inadequate snowfall, which can disrupt local activity.

Main Streets of Tomorrow: Growing and Financing Rural Entrepreneurs—A Conference Summary
By Mark Drabenstott, Nancy Novack, and Bridget Abraham

Entrepreneurship is the new focal point for rural development. This was the consensus of 200 rural policy officials and experts who gathered in Kansas City on April 28-29 for the fourth annual rural policy conference hosted by the Federal Reserve Bank of Kansas City’s Center for the Study of Rural America. For much of the past half century, rural development has been driven by twin incentives aimed at business recruitment and retention. This strategy is no longer working so well, however, for one simple reason—globalization. In a global marketplace, lower cost business sites abound, making rural incentives much less effective. Now, more and more rural regions are turning their attention to the “third leg of the development tool”—growing more businesses on Main Street. The new focus is long overdue, participants agreed, and has great promise for boosting rural economic growth.

Making entrepreneurship the new focus of rural policy will not be easy. Entrepreneurship cannot offer a quick fix since businesses take time to grow. That runs counter to the short-term focus of elected officials. Existing entrepreneurship programs do not offer a systematic approach to future business innovation and may need to be overhauled; yet there is still much information needed on which programs work best in which rural regions. Many rural entrepreneurs lack sufficient equity capital, but there is little consensus on what policy can do to fill the gap.

Despite these challenges, most conference participants agreed that rural policies built around entrepreneurship offer the greatest chance of helping rural regions. Key to adopting such policies, however, will be a concerted effort to better understand the links between entrepreneurship and regional economies, to inform policymakers of these benefits, and to develop a more systematic approach to supporting the unique needs of rural entrepreneurs.

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