US Republican senator Richard Shelby may be sceptical about the Financial Services Bill’s proposals for the establishment of a data collection agency, but US risk management professionals are seemingly keen for such a utility to be introduced. According to a recent survey of chief risk officers (CROs) by the Professional Risk Managers’ International Association (PRMIA) and the Committee to Establish the National Institute of Finance (CE-NIF), 63% of the 98 respondents indicated that they were keen for the US government to step in and collect system-wide data in order to monitor systemic risk.
The proposals in the bill are around creating an Office of Financial Research, which would include a data centre that would be charged with collecting, validating and maintaining all the required industry data for the monitoring of systemic risk. It is seemingly based on the idea behind the National Institute of Finance (NIF), which has been championed by a number of academics in the US markets and the EDM Council. Much like the NIF, it proposes to establish a data research and analysis centre to monitor systemic risk on behalf of the wider regulatory community and to publish those data standards for wider use in the market.
Obviously, given that those in favour of establishing the NIF conducted the survey, the results can be taken with a pinch of salt. However, it is an indication that risk managers are aware of the need for better data collection and analysis at a system-wide level. They are also seemingly keen for the regulatory community to take some action towards standardising and aggregating this data in order to improve the tracking of systemic risk.
To this end, the survey, which was conducted between 23 March and 9 April this year and included 98 US-based PRMIA member risk management professionals, indicates that 82% of respondents consider the current systemic risk monitoring resources to be inadequate. Furthermore, 72% of respondents said they consider that system-wide data is critical to monitoring systemic risk and 73% were keen for the introduction of more standardised data protocols. There was some acknowledgement, however, that the introduction of a data utility would be a “significant undertaking” by these respondents.
Steve Lindo, executive director of PRMIA, reckons the results are representative of a surge in interest within the risk management community around the subject of systemic risk monitoring in the post-crisis environment. “It was one of the top risk management concerns identified at PRMIA’s CRO Summit held in New York last November and the central theme of a PRMIA roundtable for CROs held in London on 16 April,” he adds.
Allan Mendelowitz, former chairman of the Federal Housing Finance Board and founding member of CE-NIF, believes the survey results are justification for all the work that has gone into getting the idea of a utility onto the regulators’ radar. He first tabled the notion at a symposium on systemic risk in Washington in June 2009 and, although the campaign didn’t get the most auspicious start, managed to get the proposals included in the governmental bill with the aid of a number of high profile academics. There has been a degree of scepticism and some concern within the market about the proposals and the initial petition to launch the NIF only managed to elicit 101 signatures from interested parties in the reference data space.
Mendelowitz, however, is convinced that this is the right step to be taking to better equip financial regulators and policymakers with more detailed data and the improved analytical capacities that are needed to understand and respond to future threats to financial stability. “We are greatly encouraged by the broad and strong support for this effort on the part of financial risk management executives as revealed by the PRMIA survey. This confirms the view that the most senior risk managers charged with the risk management of their own institutions and concerned about systemic risk support the responsibilities assigned to the Office of Financial Research and recognise the value of its creation,” he says.
Lindo contends that overall the financial sector is lagging behind other industries with regards to its management of system-wide risk and points to the aviation industry’s ASIAS programme as an example from which the sector could learn. According to Lindo, the ASIAS programme enables the sharing of relevant risk data “without compromising privacy or confidentiality, brings visibility to risks which may be common among multiple players, allows appropriate safety triggers to be designed and then monitored to check that they are working”.
But can models from other industries be applied directly to the financial services sector? No doubt, systemic risk monitoring needs to be improved but is a regulatory led data utility really the only way forward? Not everyone is convinced of the idea and there is some concern about how all of this will affect the global picture.
Moreover, Senator Shelby has also confirmed that he’ll be tackling his list of issues within the reform bill this week, so expect more criticism to be levelled at the Office of Financial Research in the near future.