On Wednesday, February 10th, the Subcommittee on Security and International Trade and Finance of the U.S. Senate Committee on Banking, Housing and Urban Affairs will hold a hearing on Equipping Financial Regulators with the Tools Necessary to Monitor Systemic Risk. The Hon. Allan Mendelowitz of the Committee to Establish the National Institute of Finance will serve as one of the witnesses at this hearing.

The danger of systemic financial risk requires a new approach to long-established and deeply ingrained financial regulation practices.  The National Institute of Finance (NIF) would be a new technical agency with the mission to provide regulators with the tools they need to mitigate financial crises, prevent future catastrophes and keep pace with innovations in the financial marketplace.

To inform the ongoing discussions of financial reform plans in the United States Congress and elsewhere, the National Research Council of the National Academies held a workshop on November 3, 2009, in response to a written request from Senator Reed of the Senate Banking Committee. The goal was to identify the major technical challenges to building the capability for monitoring and regulating systemic risk in the financial sector. The workshop is summarized in a recently released workshop report, available from the National Academies Press, Technical Capabilities Necessary for Systemic Risk Regulation: Summary of a Workshop. Among other things, the report addresses the following questions:

• What data and analytical tools are currently available to regulators to address this challenge?
• What further data-collection and data-analysis capabilities are needed?
• What specific resource needs are required to accomplish the task?
• What are the major technical challenges associated with systemic risk regulation?
• What are various options for building these capabilities?

Among the conclusions:

• "It was widely acknowledged at the workshop that the United States currently lacks the technical tools to monitor and manage systemic financial risk with sufficient comprehensiveness and precision."
• "Market efficiency will be enhanced by improved intelligence about what is going on in the system as a whole."
• "Existing capabilities to value individual instruments and manage firm-specific risks and capture system-wide exposures are not a sufficient foundation for systemic risk management."

We encourage you to download and read the full report.

Harry M. Markowitz, recipient of the John von Neumann Theory Prize and the 1990 Nobel Memorial Prize in Economic Sciences, has added his voice to the call for the creation of a National Institute of Finance. Professor Markowitz recently published his own Proposals Concerning the Current Financial Crisis in the January/February 2009 edition of the Financial Analysts Journal.

In his recent article, "Whither Financial Reform?" in the October 2009 issue of The Economists' Voice, Bob Litan offers the following supportive words for the NIF proposal:

"Finally, a group of academic scholars, financial practitioners and former regulators has suggested the creation of a data gathering and financial analytics entity, tentatively titled the National Institute of Finance, which could help financial regulators across the board keep up with and understand what Wall Street wizards and other private financial sector powerhouses are continuously inventing, marketing and using. The NIF ideally would be an independent body, with a Presidentially-appointed director (confirmed by the Senate), and would report to and work with whatever entity is charged with monitoring systemic risk. It is a good idea that, if all else fails, should be adopted."

For the full article, see: