The Office of Financial Research, considered by some to be the most important provision in the Dodd-Frank Act, is “wobbly,” says Barbara Rehm, American Banker’s editor at large, in her April 14 column.
The Office of Financial Research is supposed to collect better data about the financial markets than was available before the 2007-2008 crisis, analyze it to help regulators do a better job, and warn the Financial Stability Oversight Council when systemic risk is rising.
This is especially critical for the repurchase market, where data is scattered and incomplete.
But Rehm says the office has made little progress. From her column:
In the nine months since Dodd-Frank was enacted, the Obama administration has failed to nominate a director. It’s reportedly considering accomplished academics — Andrew Lo at MIT and Bob Shiller at Yale are two under consideration — but for now the research office is being run by the Treasury Department’s Office of Domestic Finance. …
So far, the office’s only public effort is a project to assign an identity to each legal entity within a financial company. This “legal entity identifier” will help the office build a standardized data base that will eventually allow the government to know how parts of companies interact with each other and with counterparties at other companies. ..
“The single best thing to come out of the bill is the OFR,” said Eugene A. Ludwig, the CEO of Promontory Financial Group and comptroller of the currency in the Clinton administration. “But it has one nasty flaw: it should not be in Treasury. It should be independent.”
The Treasury may indeed be part of the problem, if for no other reason than that its staff is stretched thin and it has a number of more pressing problems, like getting the debt ceiling raised to avoid a government default.
But the big financial firms share some of the blame. Self-preservation dictates opposition to the provisions in Dodd-Frank designed to curb their size or complexity. It’s in their interest for investors, counterparties and customers to assume the government will continue to bail out large companies that get into trouble.
“Each institution has an incentive to keep its balance sheet complicated, to not standardize how it reports data, to push against market utilities that could in fact make systemic risk less,” said Vince Reinhart, former director of the Fed’s division of monetary affairs who is now a resident scholar at the American Enterprise Institute. “The OFR could be an important counterpoint to that.”
Rehm cautions large banks that cooperation with the Office of Financial Research may be in their best interest, because if there is another financial crisis the next crackdown on banks will undoubtedly be a lot worse.
If Dodd-Frank’s tools aren’t given a chance to work, the industry may find that what comes next is much more disruptive.