The power of standardizing and collecting financial data was the key theme among discussions with policymakers, thought leaders, and industry practitioners at a Brookings conference on December 14. Keynotes were offered by Senator Jack Reed (D-RI), the legislative father of the Office of Financial Research (OFR), and Treasury Under Secretary of Domestic Finance Nellie Liang who is on the front line overseeing financial regulatory policy. Two panels discussed financial data collection efforts, noting the successes, failures, and global dimension of the issue. Six key themes from the day are summarized below; the full event can be found here.
Office of financial research: A headless horseman in need of help
The lack of a confirmed director to run OFR has been a recurring problem. Senator Reed noted that after OFR’s creation, the director position stayed vacant for over two years, “which was not accidental” and resulted in OFR becoming “ingrained now into the culture of Treasury rather than as independent” as Congress designed it to be. Gillian Tett noted that, “tribalism and fragmentation and tunnel vision was one of the big problems behind the financial crisis,” an issue that OFR was created to solve for data collection and standardization. Panelist Allan Mendelowitz, president of the ACTUS Financial Research Foundation, described OFR as having “a very difficult challenge because of all the bureaucratic opposition they were known to have to face within the regulatory community. Nobody likes to give up their turf.” OFR’s lack of leadership and independence has impeded its ability to achieve data standardization.
Under Secretary Liang made clear that “we could make further progress on our OFR mission and our financial stability mission if we were able to get a[n OFR] director confirmed in the Congress.” Senator Reed discussed where the process stood stating: “The president nominated Ron Borzekowski, who is here, and who came before our committee and was extremely impressive. He was passed out of committee on a strictly partisan vote, which I don’t think represents his qualifications. And is still waiting for confirmation.” There was broad consensus among participants that OFR could do more if and when a director is confirmed.
Financial data holes: A national security threat
I brought up the linkage between national security and financial data, pointing out that: “One of the arenas of war is financial markets” and that “when Russia invaded Ukraine, one of the major tools of response was to cut Russia out of the global payment system, to know who Russia is and to cut them out.” I argued that “Financial markets are not just tools for economic growth, but are tools for national security and global security. One way to think about OFR is as a financial intelligence agency to provide the information and the data” that America needs as part of our national intelligence and security. Senator Reed, who serves as Chairman of the Senate Armed Services Committee, agreed: “This is a national security issue in terms of understanding financing, cutting off financing for countries, etc.” Sen. Reed said: “The argument we have to make, that this is not just a wonky economic sort of group. These people could do some significant help, if you will, for national security.”
Reed linked OFR to Russia’s war against Ukraine and to our relationship with China, stating: “If we had a much more comprehensive system of identifying financial entities and their accounts, we would have a much better way of securing or preventing Russia from doing what they’re doing. And frankly, it would be a significant, I think, obstacle to Chinese aspirations if they felt that their economy could be isolated or their assets identified.” Under Secretary Liang brought up the potential risks artificial intelligence and cyber threats data, explaining that “Treasury is working on… the role of AI related cyber risks. And that is an area that’s about protecting data, protecting data storage, processing capacity.” When you are the person on the front line managing the Financial Stability Oversight Council, as Treasury Deputy Assistant Secretary (DAS) Sandra Lee said, “Everything keeps me up late at night.” Having a confirmed OFR director would put one more general on the battlefield to protect America’s financial system and enhance our national security.
It does not count if not counted
Ben Harris, Brookings Vice President and Director of the Economic Studies program, kicked off the event noting that the simple goal of “understanding who owes what to whom” is central to understanding the interconnectivity within the financial system. Under Secretary Liang drove home the regulatory challenge inherent in identifying risks: “We can’t manage risks if we can’t effectively measure them.” Chris Wheat gave an international insight, saying that, “in the U.S. we don’t have an infrastructure that produces as many sort of fixed identifiers” to track retail activity as they do in other nations. Stephan Wolf made the point that requirements in one regime have domino effects, as evidenced by Europe requiring money market funds to track identifiers of assets it owned, resulting in gold miners in the Philippines issuing legal entity identifiers (LEIs). Data standardization and collection can have powerful, global ramifications.
Professor Kathryn Judge of Columbia University argued that uniform data standardization has an underappreciated benefit: “The more we manage to actually implement meaningful and useful data standards, it’s going to, ideally, over time, reduce regulatory burdens by creating more standardized forms of reporting.” Michael Atkin echoed the benefit from an industry standpoint noting that, “from a bank perspective, standards basically means policy” highlighting how regulation regarding data standards can drive policy. He continued that, “from a technology perspective, standards mean format and data exchange,” making the core point that once data have been standardized, they can be exchanged across many different platforms.
America lags LEI adoption
Moderator Gilliant Tett of the Financial Times noted, “if you can create barcodes for tins of baked beans and chewing gum, you should be able to do that with securities.” Part of creating that structure was establishing legal entity identifiers (LEIs) which are meant to function “similar in concept to a bar code on store items but that instead precisely identifies parties to financial transactions.” As the Office of Financial Research noted after the financial crisis of 2008: “The lack of a universal entity identifier made it difficult for firms and regulators to assess market exposures to risky or failing institutions. An LEI would promote financial stability by illuminating those exposures. It would also contribute to market efficiency by enhancing transparency for investors, reducing reporting burdens and other operational costs for financial firms, and improving customer service.” The United States kicked off issuing legal entity identifiers with the first mandate in 2012. The Financial Stability Board subsequently committed to the creation of a standard Global LEI.
A decade later 2.4 million LEIs have been issued according to Stephan Wolf, chief executive officer of the Global Legal Entity Identifier Foundation, covering “roughly 90% of the global market capitalization.” Wolf went on to note that China and India are issuing LEIs at among the fastest rates in the world and that India is using LEI’s for identifying counterparties in domestic transactions. Mendelowitz pointed out that the U.S. is now a laggard in LEI adoption, criticizing the Federal Reserve: “And has the Fed adopted [LEI]? No. The Fed had its own data system and said, ‘We don’t need this.’” This motivated his organization, ACTUS, to create, “a financial instrument reference database or financial instrument standard for financial contracts that in fact generates the cash flow obligations of individual financial contracts with a high level of precision which defines not only who owes whom, what, but when as well.”
Data for resilience
Silicon Valley Bank’s failure and the surrounding shocks to the banking system were discussed throughout the day. Under Secretary Liang was clear: “I don’t feel like lack of data was either what led to it or compromised how policymakers responded.” Panel moderator Ylan Mui brough up the argument that “data doesn’t necessarily increase stability, but it can certainly enhance resilience.” Judge responded that she is “still hopeful enough to actually think that better data and better information and better analytics can have virtues, both in terms of making crises less frequent and in terms of resilience.” Improved financial data will not solve financial stability, but even in circumstances where shocks occur it can help create a more resilient system. Under Secretary Liang illustrated the impact of data on resilience: “Greater data transparency and new data collections are critical parts of our efforts to improve the resilience of this Treasury market.”
“You have what you have” in terms of data when a crisis starts Under Secretary Liang stated. Sen. Jack Reed argued that “collecting the data before the next financial crisis begins is essential because once the crises begin, you need a lot of luck. I’d rather have a lot of knowledge before it began.” Sounding a note of optimism, Harris stated, “What is achievable is to know who owes who what. That is, we can create a set of financial data, transfer that information to regulators, and understand the flow of liabilities and assets across the economy.” Echoing that, Stephan Wolf reminded us that: “Ronald Reagan 35 years ago said, ‘Mr. Gorbachev, tear down this wall.’ And now we are in charge to tear down the walls between the silos. And the only way of doing that is interoperability, common denominators, common data standards and things like that. So there’s a lot that we have to do.”
Climate data: A ray of hope
Climate risk was one area where multiple speakers noted progress made in enhanced data reporting and standardization. Climate risk has been cited as a potential threat to financial stability by the Financial Stability Board, European Systemic Risk Board, and the Financial Stability Oversight Committee (FSOC) who deemed it “an emerging and increasing threat to financial stability.” Treasury Deputy Assistant Secretary Sandra Lee framed the climate data issue succinctly: “What are the key risks, what are the data that we need, and how can the agencies collaborate and work together to reduce duplication [and] pool resources, and we have made quite a bit of progress with our climate related financial risk committee.”
To solve those questions, OFR created a Joint Analysis Data Environment (JADE) system. Currently in its pilot stage, JADE is designed to allow all financial regulatory agencies to have “access to analysis-ready data, analytical software, and high-performance computing in a secure, cloud-based environment.” JADE’s ability to standardize and collect data was cited as a prime example of how the agency can use data standardization and collection powers to address a gap in existing risk framework. Treasury Under Secretary Liang made clear that JADE’s benefit of providing resources “in a collaborative space enables FSOC member agencies to focus on the research, rather than individually obtaining the necessary resources to conduct their work.” JADE appears to be a prime example how standardizing and collecting data serves as a base layer to catalyze analysis—and potentially regulation—to solve extant financial stability threats.
The failure to prioritize nominating and OFR director and the subsequent slow walk of his confirmation has reduced America’s economic and national security. Without a head, OFR finds it difficult to assert itself, despite legal authorities, to standardize existing sources of data collection. This is one reason perhaps why OFR has had more success in dealing with new forms of data—like climate risk—than in breaking down existing regulatory silos. The benefits of standardizing financial data remain high, including the possibility of a win-win with better informed policymakers and lowered compliance costs for industry. It remains to be seen whether this improved outcome will be realized.
Acknowledgements and disclosures
This event was made possible due to the generous support of the Sloan Foundation.
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