When President Obama recently spoke to Wall Street and discussed the financial crisis, he said, "Regulators may have seen the trees but missed the forest."
Similarly, last year then-Treasury Secretary Henry Paulson, said: "Our current regulatory regime is almost solely focused above ground, at the tree level. The real threat to market stability is below ground, at the root level." If we replace the metaphor of a tree with the reality of silos of regulation and silos of financial businesses, then we can begin to understand the problems in ways that will allow us to fix them.
President Obama's analogy speaks to the lack of both cohesive and timely U.S. and global regulatory oversight. Secretary Paulson's problem at the roots refers to the inability of regulators to observe the positions and trades of financial institutions and to aggregate such data for understanding risk exposures across the entire dimension of their interrelated but separate businesses. For that matter, neither can they aggregate this data across the many financial firms that report to them periodically within their individual regulatory silos. This is preventing regulators from observing risk concentrations across all products and markets that they trade in. And they certainly cannot do this in any timely fashion across the global dimension of the businesses that the largest, most systemically important financial institutions operate in.
Remedies are simple to postulate, a global systemic regulator having the ability to both gather and then aggregate data in a time frame that more closely relates to the real-time nature in which financial transactions accumulate risk exposures. The framework is already in place with regard to a global regulatory regime. The Group of 20 is meeting this week in Pennsylvania and its Financial Stability Board is in place. The industry, with European and U.S. regulatory prodding, is organizing itself around a central data repository, a long-sought goal that seems finally to have been forced into being by the financial crisis.
Maintaining the momentum for permanent change is what our leaders have pledged and what is required if we are to overcome the prospect of another financial crisis. There is no excuse for not fixing the problems we already know about.