Proof yet again that the US regulatory community might not be aware of the implications of the Office of Financial Research reform proposals comes in the form of recent comments made by Philadelphia Federal Reserve Bank economist Leonard Nakamura. Nakamura made proposals last week that an all encompassing instrument database be established to help regulators to monitor systemic risk, but failed to note that the Office of Financial Research proposals include a similar idea, albeit focused on systemically important financial institutions.
Last week, the US Senate engaged in a debate about the reforms that included discussion of the Office of Financial Research proposals, but Nakamura’s comments are seemingly about the development of a different database to be maintained by the Federal Reserve itself, in accordance with its role as the systemic risk overseer. He has been talking about the idea for some time during a number of workshops on the subject of systemic risk oversight and has produced a white paper on the subject that is doing the rounds amongst central bankers.
Nakamura notes in the white paper: “Such a database would have been of material value to US regulators in ameliorating the recent financial crisis and will be of aid in understanding the potential vulnerabilities of an innovative financial system in the future.” He then suggests that a US systemic risk regulator would be the natural operator for this database, which would ensure that all financial instruments have “permanent identifiers”.
Given the scale of this challenge, not all are convinced of the cost/benefit ratio of maintaining such a large database, however. Much the same as concerns about the Office of Financial Research indicated by Republican senator Richard Shelby, some Fed employees are also concerned about the end cost of establishing and running a database of that size.
Joseph Haubrich, head of the Banking and Institutions Group at the Federal Reserve Bank of Cleveland’s research department, has publically noted that it could prove to represent a data overload for the regulatory community and has asked for more clarity about how the data could be put to use, given the technology limitations of the regulators. Moreover, it would also potentially increase the reporting burden on financial institutions already facing a barrage of new requirements.
Regulatory data overload is a serious consideration that must be taken into account in light of the Lehman examiner’s experience earlier this year and the more recent experience of the regulator investigating Goldman’s customer data. It is all very well to gather and maintain this data, but if it isn’t actually put to good use, then it constitutes a costly waste of time and resources. This is something that has been discussed as a failure of some firms’ own enterprise data management (EDM) implementations but has not yet been considered at the regulatory level; a much more public failure, should something go wrong.
Nakamura’s white paper has not yet been published for public consumption.