WORD ON THE STREET: In drafting the Dodd-Frank Act, Congress recognized that better information and analysis will be critical to the success of the Financial Stability Oversight Council (FSOC) and its member agencies. In the lead-up to this crisis, financial reporting failed to adapt to an ever-evolving financial system.
Both supervisors and market participants lacked data about the buildup of leverage in the rapidly growing shadow banking system. Policy-makers and investors responded to the crisis with inadequate information about the interconnectedness of firms and associated risks. That is why the Dodd-Frank Act created the Office of Financial Research (OFR).
As the statute requires, the OFR will have a data center to set standards for financial reporting and improve the quality of data that supervisors and market participants rely on to manage risk. These standards will make it easier to spot emerging threats. For example, more consistent and complete reporting of derivatives will make it easier to track how they redistribute risk through the system. Data standards will also improve market discipline, as individual firms will be better able to assess their own risks, and standardization may lower firms' costs over the long run.
The data center is also required to develop and publish key reference data that identify and describe financial contracts and institutions. Regulators and supervisors, as well as private firms and investors, rely on such reference data to analyze risk. Gaps and inconsistencies in existing reference sources inhibit meaningful analysis. The OFR will seek to close gaps and increase consistency to improve risk analysis and strengthen market discipline.
To help the FSOC fulfill its role, the Dodd-Frank Act mandates that the OFR have a research and analysis center. Although no analytic effort, no matter how thoughtful, can anticipate all risks, the OFR can help identify undue concentrations of risk such as those at AIG before the crisis. And the OFR can help ensure that, when the next crisis begins to emerge, the government has the information and analytical tools it needs to respond appropriately.
The OFR will be headed by a director nominated by the president and confirmed by the Senate. The director will have an independent obligation to report to Congress on threats to the financial system. We envision a director who combines the capacity to lead a cutting-edge research program with experience in both data-systems management and risk analysis.
Until there is a confirmed director, the Treasury staff team working on creating the OFR has been hard at work planning its functions and gathering input from regulators and private parties. Our OFR team will continue to coordinate closely with other members of the council.
We will move quickly to complete a census of existing data-standardization initiatives and existing sources of reference data. The OFR will work to maximize the effectiveness of existing private-sector efforts.
The OFR must not duplicate existing government data-collection efforts or impose unnecessary burden. That is why we are working with the regulators to catalog carefully the data they already collect to ensure the OFR relies on their data whenever possible, as the Dodd-Frank Act requires. The OFR will help the government get the most out of existing data by facilitating sharing among agencies. We are also identifying existing private data sources to improve risk monitoring without imposing new burdensome data-collection mandates.
When we have finished assessing existing public and private data initiatives, we will move quickly to draw up detailed plans for OFR to facilitate and advance these initiatives without duplication or unnecessary burden. We also are developing organizational structure, hiring procedures and pay structures, information technology and other requirements.
Our efforts to establish the OFR will stay focused on ensuring that the OFR protects private information and trade secrets. The Dodd-Frank Act provides strict protections for data security and confidentiality, and we take seriously our obligation to implement these protections fully. In the coming months, our OFR team will be developing confidentiality policies and procedures for the OFR and its data centers that meet the highest data security standards.
We will, in all these efforts, continue to seek advice and expertise from the private sector, academia, and Congress. Working with the FSOC, we will seek to formalize our outreach by establishing advisory committees. The lessons and information we take back will be built into the foundations of the OFR.
This article is adapted from testimony written by Treasury Deputy Secretary Neal Wolin for delivery before the Senate Banking Committee. The full text of Wolin's testimony is available here.
