The Consumer Financial Protection Bureau isn’t the only Dodd-Frank Act agency poised for change in the new year. With the abrupt departure of its director last month, the Office of Financial Research may also be facing a shift in direction.
Since its inception, the office has largely remained out of the public eye. But it’s tasked with an important role: collecting and standardizing complex market data and conducting research to help the Financial Stability Oversight Council root out the next financial crisis.
Now the office’s functioning — and independence — may be under threat.
Treasury has promised to slash its budget and staff significantly in the coming year. And the Trump administration has named Ken Phelan, who has served as Treasury’s chief risk officer since 2014, as the office’s acting director. That’s notable because Treasury has also called for bringing the office more completely into its fold.
The department recommended in June that the office should become “a functional part of Treasury” — with its director appointed by the secretary and removable at will. The office’s budget, which is currently paid for by bank assessments, would also be determined by Treasury.
If the president selects a director whose views about the office mirrors his own, that will be a marked contrast with the intentions of those who originally conceived of the OFR.
In the wake of the mortgage meltdown, a group of academics called for the creation of a fully independent office — much like the CFPB — that would, among other things, alert regulators and the public early to the possibility of future crises.
Critics have said a fatal flaw occurred during the writing of Dodd-Frank, when the OFR was ultimately placed within Treasury, albeit with an independently appointed director and separate funding stream. That created a difficult balancing act for the agency from the get-go.
And, to be sure, the office has struggled since its inception. Some observers have been disappointed with what the bureau has accomplished. They say the OFR should be producing more and higher profile work. The office has also been plagued by low morale and frustrations with management. The Government Accountability Office publicly scolded the OFR in a report earlier this month for being slow to provide it with necessary information and for potentially misleading the agency.
It’s very possible this dysfunction will be used as a stalking horse for bringing the office under Treasury’s full control.
Yet there’s a good argument to be made for increasing the agency’s independence at this stage — not reducing it further. An independent office is better able to call out problems in the economy as it sees them, without succumbing to political pressures. Ideally, its warnings would spur robust public debate among regulators and Congress about what needs to be done to reduce those risks.
The Treasury Department is, by design, less well suited to this role. For starters, it’s an arm of the administration. And because of its stature in the economy, Treasury’s top officials are not necessarily incentivized to speak openly and frankly about looming threats, lest they spook the financial markets.
Those who dreamed up the OFR in the wake of the crisis made a strong case for an independent watchdog. But it now appears the office may be heading even further in the other direction.