Not long before the subprime mortgage crisis metastasized into a global financial crisis, it dawned on U.S. regulators that they had a huge blind spot.
"Nobody had a clue where all those mortgages were being held," said William Isaac, a former Federal Deposit Insurance Corp. chairman. "You should have had an information system that was tracking that. But nobody really thought there was a need for it because, after all, these mortgages were being securitized and sold off to investment trusts, and 'who cares' where they went. They were out of the banking system, and that's all the regulators cared about. Now we know we needed to know."Despite this recognized need, the 'Mother of All Databases' for the global financial system does not exist. In fact, regulators are doing remarkably little to either create this database themselves or to give the private market an incentive to create it.
Today, as the banking industry recovers, regulators are focusing, laserlike, on making sure they and the institutions they supervise — particularly the largest ones — know everything they need to know.The comments by Jamie Dimon and Gary Cohen in Davos clearly show that the largest financial institutions do not have and want access to the current asset-level data they need to know everything they need to know.
... regulators are concerned not just about data systems but also about whether bank managers have sufficient experience to analyze the information and manage the risk.
"It's not just: 'Do you have super-fast computers?' That helps, but it also matters what data are the computers collecting and what are institutions doing with it?" said Isaac.As readers of this blog know, the data that needs to be collected is current asset-level data on an observable event basis. This is the useful, relevant data that needs to be provided to all market participants in an appropriate, timely manner. With this data, market participants can use the analytic tools and models of their choice to monitor and mitigate risk.
... As the panic of 2008 showed the consequences of poorly managed risk, observers said, the agencies gained interest in companies' modernizing their systems.
"The regulators by and large have been reasonably patient with banks in terms of recognizing that it takes time and that it's hard, but I also think that in this environment — we're coming out of a crisis, and people are focused on issues like resolution authority — there is a lot more attention being paid to systems now maybe than there has been in the past," said John Douglas, a former general counsel at the FDIC and now a partner at Davis Polk & Wardwell.To the extent that regulators are also trying to upgrade their systems to manage risk, there is the Office of Financial Research. According to a Bloomberg article:
The research office is only now beginning to attract attention for the unusually strong powers Congress granted it to force financial companies to turn over confidential information and help spot potential market blowups. In a nod to its abilities to peer into the uncharted depths of the financial system, lobbyists are calling it the CIA of financial regulators.
The analogy may not be far off. Housed within the Treasury, the office will have both data collection and analysis arms. The law says it can demand "all data necessary" from financial companies, including banks, hedge funds, private equity firms, and brokerages. That would include previously secret details such as who the counterparties are for credit default swaps and information on individual loans such as interest rate and maturity....the research office can require companies to submit "periodic reports" to help it determine which firms to keep tabs on.In theory, the Office of Financial Research could create the 'Mother of All Databases' by requiring disclosure of current asset-level data.
... Among its first duties: Telling financial companies how their data must conform, so they can be more easily compared.If the 'Mother of All Databases' is going to be successful, it must be global. What good is it for monitoring the risk of a large, international financial firm if it does not have all the current asset-level data for the firm on a global basis (after all, risk can be pushed into non-reporting off-shore subsidiaries).
The fact that the Office of Financial Research is a US governmental entity creates a number of barriers to its creating the 'Mother of All Databases':
- Will it be able to collect current asset-level data from non-US subsidiaries of financial firms located in the US?
- Will it be able to collect current asset-level data on a global basis from non-US financial firms that do business with US financial firms? (this would be hard to imagine when you think about Swiss bank secrecy)
- Can the Office of Financial Research ask for current asset-level disclosure for structured finance securities if the Securities and Exchange Commission only requires once per month or less frequent reporting?