The Office of Financial Research, established by the Dodd-Frank Act to help regulators identify and thwart systemic risk events, faces a daunting task.
Not only must it navigate the diffuse interests, missions and agendas of well-established financial regulatory agencies, it will also have to pass through an information landscape pockmarked with out-of-date technology and poor data for conducting comprehensive systemic risk analysis.
But this is not the first time a new federal agency has had to quickly assert its authority: The Department of Homeland Security offers important parallels to the challenges the OFR will confront.
Following 9/11, the Homeland Security department was given a mandate to coordinate the collection and sharing of sensitive global and U.S. intra-agency data and analysis, all in order to conduct threat assessments to the U.S. homeland and our interests abroad. In this regard, OFR and DHS bear uncanny similarities of purpose and origin, rising out of the ashes of two national catastrophes. And, as in the case of counterterrorism, systemic risk threats against the U.S. financial system will not likely abate any time soon (as we are seeing play out currently in Europe).
Like the OFR, DHS found itself at the center of political controversy since its inception. Also complicating its mission was coordination of vast amounts of data across multiple agencies — both in the U.S. and abroad — with different purposes for that information. Another noteworthy similarity is the DHS was also challenged with protecting highly sensitive data of large complex institutions, U.S. citizens and foreigners.
OFR faces no less of a task in its role as the nation's early warning system for financial sector risk. Despite the critical importance of its mission, it faces enormous obstacles in the form of competing (and vested) interests among the financial regulatory community, a skeptical industry, U.S. Congress and global regulators.
To address immediate needs and to fulfill its long-term vision, OFR must embark on a two-pronged course of action: the first focusing on quick execution of data and analytic proofs-of-concept; the second coming in building out the long-term capabilities of the agency.
In facilitating near-term activities, the Financial Stability Oversight Council (the confederation of regulatory agencies to which OFR reports its findings) must reinforce the OFR's role among member agencies and provide it essential air cover to conduct its mission.
Presently, a number of financial regulatory agencies, caught flat-footed in identifying the looming crisis in the mortgage market and its contagion effects across the financial sector, are engaged in a variety of data collection and analysis efforts to facilitate better supervisory oversight of their regulated institutions. Many are undertaking large-scale supervisory and research modernization programs as well.
The combined effects of agency introspection in the wake of a failure to identify the last crisis and political maneuvering among the agencies greatly weaken the OFR's mandate as the primary catalyst for systemic risk assessment.
Thus, the FSOC must clearly mandate collaboration among its agencies, starting with a detailed inventory of all existing financial data. The OFR's efforts in promoting a set of legal entity identifiers (commonly referred to as LEIs) to standardize financial transaction data exemplify the kind of efforts OFR must lead.
Each agency should establish an OFR liaison office to which technical and analytic staff is assigned as part of their regular duties. OFR also needs to establish an industry data council similar to what DHS has done to facilitate ongoing dialogue with members of the financial community. Data practices among banks have a spotty track record at best, so coordinating best practices in data management that must be used by OFR is essential. Not only that, but there must be a strong governance framework for identifying, managing and monitoring the requirements for sharing of information for the new OFR. Optimally, every agency which handles data must be drawing from the same page — and should have input into the type of data they need and the tools needed to analyze the data.
On the analytics side, and borrowing from the DHS experience, the application of "situational awareness" to the assessment of systemic risk would elevate the OFR’s capabilities from the standard approaches applied today. More than anything else, risks are dependent upon specific events and circumstances. Pioneering a set of practical analytic capabilities in a type of "skunk-works" fashion would facilitate rapid prototyping of innovative technologies from academia.
Such quick-strike efforts demonstrating OFR's positions it for long-term sustainability as the pre-eminent agency for identifying vulnerabilities in our financial system. Moreover, it helps plug a gaping hole in our systemic risk infrastructure that exists today.
Clifford Rossi is a strategic advisor to Deloitte and an executive-in-residence and finance faculty member at the University of Maryland's Robert H. Smith School of Business. Mitchell Glassman, the former director of the Federal Deposit Insurance Corporation's resolutions and receiverships division, is a director with Deloitte Consulting LLP.
