The Government's 'Canary in the Coal Mine'
April 5, 2010
The Office of Financial Research (OFR) occupies just 20 pages in the Senate Banking Committee's massive 1,336-page financial reform bill-but its importance far outstrips the brief space devoted to it.
The OFR, variously referred to as the Office of Research and Analysis (by The New York Times) and the National Institute of Finance (its name in a bill introduced by Sen. Jack Reed, D-R.I.), is a proposed new risk body designed to give financial regulators the data and analytic tools they need to prevent and contain future financial crises.
It would, in effect, be a kind of "canary in the coal mine" for the entire financial system, providing early warnings of possible collapses.
Its role, according to Reed's Feb. 4 statement upon introducing his bill, is crucial. "Any new regulatory structure will be ineffective," he said, "unless we also equip it with a strong, independent and well-funded data, research and analytic capacity to fulfill its mission."
Reed says the proposed body will support the community of financial regulatory agencies by collecting and standardizing the reporting of data on the financial market; performing applied and essential long-term research; and developing tools for measuring and monitoring systemic risk.
It is part of a two-part approach to systemic risk oversight in the Senate's reform package (also known as the Dodd bill). The second piece is the Financial Stability Oversight Council (FSOC), which is envisioned as a kind of "College of Cardinals" composed of the heads of existing regulatory agencies.
GUTS OF THE SYSTEM
The OFR is what Kurt Schacht, managing director for standards and advocacy of the Chartered Financial Analyst Institute, calls the "guts of the system" of risk oversight being proposed by Congress. It will be tasked with setting up the systems and operations to track and aggregate systemic risk, he explains.
The OFR will in turn feed information into the FSOC, which will make the decisions about what to do with it.
"The OFR ... will set up all the systems to track and aggregate systemic risk across the system," Schacht explained in an interview. "The information will be fed into the Financial Stability Oversight Council, which decides what to do with it."
Also advocating for a National Institute of Finance, or OFR, is the Committee to Establish the National Institute of Finance (NIF). "The OFR is in essence the National Institute of Finance, re-proposed," explains John C. Liechty, an associate professor of business at Penn State University and a founder of the Committee, which is made up of researchers, economists and statisticians, including Nobel laureate Harry Markowitz.
"The OFR can look across the landscape and identify risks," Liechty said. "It retains most of the authority in the Reed bill. We are the least controversial part of the whole title.
You can't do systemic risk regulation without gathering the appropriate data."
As far as organizational specifics, both the House and Senate reform bills include a data center and a research center within the OFR.
According to both bills, the data center's mandate includes the following:
1) Maintain reference databases (legal entity and financial instruments)
2) Develop and maintain reporting standards
3) Collect, validate and maintain transaction and position data, allowing for granular, exposure level systemic risk models (optional in the Senate bill)
4) Secure and protect the data
5) Make the data available to regulators