The financial regulatory reform bill is a sprawling piece of legislation that will have a profound impact. For many, focus is now on a new office that could wield enormous power and fundamentally change the way banks gather and report data: The Office of Financial Research (OFR).
John Avery, a partner in SunGard's financial services consulting business, describes the coming regulatory framework for banks and financial institutions as "a new era of regulatory oversight that is very data driven."
A central item is the creation of the Financial Stability Oversight Council to oversee systemically significant financial firms. To assist the council, the bill creates the OFR, which will be housed within the Treasury Department.
The primary purpose of the OFR will be to collect and analyze data for the council's use. But what information the OFR will collect remains to be seen. As Jim Hamilton, a principal analyst at Wolters Kluwer Law & Business, puts it: "They can demand information, but it's not clear what they will ask for. But anything with subpoena power I pay attention to."
While created to keep tabs on systemically important institutions, Jonathan Hightower, an associate at Bryan Cave, argues that the OFR's data requests are likely to include many smaller institutions:
"While the functions of the Office of Financial Research will certainly lead to enhanced reporting requirements for bank holding companies with $50 billion or more in consolidated assets...it is reasonable to expect that the office will need additional data from the financial industry as a whole in order to provide adequate context in its analysis of data collected from large financial firms.
For that reason, the conference text of the regulatory reform bill allows the OFR, after consultation with its director and the Financial Stability Oversight Council, to require the submission of periodic or other data from any financial company [which would include banks and bank holding companies of any size] in order to assess 'the extent to which a financial activity or financial market in which the financial company participates...poses a threat to the financial stability of the United States.'"
The bill's provisions are expected to phase in over several months, even years, to give banks time to implement the technologies necessary to comply with OFR data requests. Andrew Freeman, executive director of the Deloitte Banking Center, argues that since OFR's data requirements are not clear, and might evolve over time, banks need to implement flexible systems that can cope with different kinds of data requests. "Firms are at a crossroads and can't put off technology upgrades much longer," he says.
SunGard's Avery says one of the "unintended consequences of regulatory reform will be a dramatic increase in the spending on information management."
He predicts the OFR will first focus on determining what data is necessary to normalize comparisons across the industry. Once that's settled they can build tools for risk monitoring and other analytics on top of those clean data sets.
Srini Giridhar, IBM Institute for Business Values' global banking lead, argues that the best IT systems won't just permit compliance with the new rules, but also enable better business decisions. Regulators generally aren't going to tell banks they can't take a certain risk, they're going to tell them the amount of capital reserves they'll need to take that risk. Systems that deliver data to the OFR could also help banks judge how best to allocate their capital based on these regulatory requirements.