|A CALL TO CREATE A NATIONAL INSTITUTE OF FINANCE|
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.
The Need: Recent turmoil in financial markets revealed serious flaws in the nation’s established processes of financial regulation. Our current approach focuses on the health of individual institutions, viewed in isolation. The events of 2008 revealed the inadequacy of this approach: when institutions are linked tightly in complex chains of obligation, the collapse of a central entity can threaten the stability of the entire system. New analytical capabilities are needed that allow regulators to monitor and safeguard the financial system as a whole.
Despite the skills and dedication of its members, our financial regulatory community is ill-equipped to meet this challenge. Regulators do not currently have any operational methods by which to measure and monitor instability in the financial system, let alone prevent its occurrence. They lack the capacity to map the network of financial obligations between firms, analyze the degree to which firms are exposed to each other or predict when the failure of one firm will threaten the viability of its counterparties. The federal government does not even have its own capacity to run the stress tests used to evaluate whether financial institutions can withstand simulated economic shocks. Instead, regulators were recently forced to outsource this vital analytic task to the very firms under evaluation.
Efforts to respond to systemic risks are further hampered by the way the government collects and manages financial data. While financial institutions already report a great deal of data to federal regulators, they don’t report the types of data needed at the level of detail required that would enable a holistic assessment of firms’ exposures to each other. More fundamentally, firms currently report data in a diversity of formats that are often mutually incompatible and require conversions that are difficult, expensive and error-prone. With no established and enforced standards in place, data from different sources cannot readily be linked, compared or analyzed in an integrated fashion. Consequently, it is currently impossible to create a comprehensive picture of the whole financial system that identifies the sources of potential instabilities.
The National Institute of Finance: Concerned that efforts to reform financial regulation might fail to address the need for better data and analytics, a coalition of concerned academics, regulators, industry professionals and other interested individuals have come together to propose solutions. They urge the creation of a new agency within the U.S. government: The National Institute of Finance (NIF). Working under the proposed Systemic Risk Regulator, the NIF would provide the financial regulatory community with needed technical and analytic services related to data management, tool development, research and analysis. The NIF would provide the financial regulatory community with capabilities that are essential to managing systemic risks and maintaining effective oversight of financial markets. The NIF will: