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The Office of Financial Research

The Office of Financial Research. Origins and Vision. Credit Crisis of 2008. Did they know what was going on? Did they have a choice?.

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The Office of Financial Research

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  1. The Office of Financial Research Origins and Vision

  2. Credit Crisis of 2008 Did they know what was going on? Did they have a choice?

  3. “If this crisis has taught us anything, it has taught us that risk to our system can come from almost any quarter. We must be able to look in every corner and across the horizon for dangers and our system was not able to do that.” Secretary Geithner, opening remarks, testimony to Senate Banking Committee, June 18, 2009.

  4. A Stable Financial System • Innovation has outpaced regulators and markets (ability to price crisis risk) • Financial Crisis Cycle (4 Ls Andy Lo) • Leverage – build up of asset bubbles • Losses – causing fire-sales and cascades • Linkages – contractual, similar positions • Liquidity – panic lack of trust, credit freezes • Don’t have data or models to understand

  5. The Office of Financial Research • OCC workshop, Feb. 2009 • Proposed National Institute of Finance (NIF) • Collect system-wide data, build analytic tools and monitor systemic-risk • Committee to Establish NIF • Broad collection of concerned citizens • Legislative Response – OFR in Senate bill

  6. Summary of LegislationDodd Frank Act 2010 • OFR Works for the FSOC • Better data and analysis tools • Long-term research • Regulatory Commons • Independent voice • Two components • Data Center and • Research and Analysis Center

  7. Market Driven Stability • Market Forces Can Stabilize • Transparency and a fair price for crisis risk • Regulators will struggle to price correctly and enforce this price • Parallel Industry Effort Needed • The innovators need to be incentivized • Infrastructure built up to allow market participants to measure/price crisis risk

  8. Industry Case Study • Operational Risk Exchange • Industry owned utility (50+ banks world wide) • Share operational loss data • Driven by Basel requirements to hold capital against operation losses • Crisis risk is different • More data, more complex modeling • Similar problems in sharing back information

  9. Neccesary and Sufficient • OFR (macro prudential) is necessary • Provide transparency • Exercise broad corrective action when needed • Market pricing is sufficient • Needs motivation and incentive (provided by regulators) • Market price will punish excessive risk takers, crowded trading, extreme leverage, …

  10. Supplemental Slides

  11. Summary of LegislationDodd Frank Act 2010 • Data Center • Reference data • Legal Entity • Financial Instruments • Reporting standards • Collect system-wide, granular data (positions) • Keep data secure • Share data – • Member Agencies • General Public

  12. Summary of LegislationDodd Frank Act 2010 • Research and Analysis Center • Develop monitoring systems (financial stability) • Measure and report on financial stability • Evaluate stress-tests • Policy advice • Best practices in risk management • Conduct, coordinate and sponsor research • Investigate and report on financial disruptions • Share tools and findings with member agencies

  13. Summary of LegislationDodd Frank Act 2010 • Authority of the OFR • Set reporting standards • Require data (subpoena power) • Independence of the OFR • Director appointed by President for fixed term • Director makes key decisions (budget, hiring) • Director testifies without prior review • Funded by Fed first 2 years, after that by large financial institutions 50b+

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