Richard Berner, Director of the Office of Financial Research (OFR) at the U.S. Department of the Treasury, emphasized the need for better data and analysis to address gaps that pose a risk for systemic stability in a recent speech. Berner expressed concern about these information gaps, particularly for financial activities outside of traditional banking. According to Berner, filling these information gaps can inform decision-making regarding which policy tools can address risks in the financial system.
Berner observed that the post-crisis emphasis on traditional banks has prompted market participants to move to less regulated areas of the financial system. For example, he noted that increased regulation and low interest rates have pushed banks to regulatory arbitrage in unloading functions such as mortgage servicing and proprietary trading to non-banks. Berner suggested that a regulatory approach for dealing with risk issues in the shadow banking system should focus on activities rather than individual shadow banks. With respect to money market funds, he recommended that any regulatory changes that the SEC adopts should be matched for similar cash management vehicles to reduce the incentive for regulatory arbitrage.
Berner emphasized the need for data and analysis on both banks and non-banks in order to close the regulatory gap, specifically on the shifting functions between the two. Berner pointed out the OFR’s role in analyzing “the paths of risk and the durability of funding through specific financial institutions during crises.” The OFR has identified “gaps in data needed for financial stability monitoring” by analyzing and simulating these pathways. By identifying the business models and all parties to financial transactions, the OFR would be able to properly assess risk in the financial system and evaluate potential remedies.
With respect to clearinghouses, Berner emphasized that central counterparties need to be made “super-resilient,” but that doing so would require a better understanding of what data would be necessary. Berner pointed out that, while central counterparties can mitigate some risks, the risk of concentration is such that the failure of a global central counterparty would be a “big problem” for the financial system. He explained that analyzing the requirement of central clearing on participant decision making and its effect on specific products and on the market in general is a particular area of focus for the OFR. Berner also noted a related initiative between the OFR and the Commodity Futures Trading Commission to analyze the data from swap data repositories.