On February 12, Federal Reserve Governor Daniel Tarullo gave testimony before a Senate subcommittee, centered on the issue of systemic risk regulation and the need for reliable data.
Tarullo explained that the current level of data collection was insufficient to give regulators the type of information they needed to adequately analyze for systemic risk. Indeed, the shadow banking system, from whom the "absence of data" was a problematic cause of the financial crisis, was outside their authority.
What was missing was that the Federal Reserve was not collecting loan-level detail, an oversight which Tarullo stated was now being done in a limited form. However, the Paperwork Reduction Act constrained their ability to collect data from more than 9 sources and Tarullo would like the systemic risk regulator exempted from those OMB restrictions.
What is so interesting about this testimony is that for the first time, the Federal Reserve has begun to publicly focus on the need for loan-level detail as to structured finance securities and loans on bank balance sheets. If one reads this testimony together with the Obama administration's proposed legislation to create a systemic risk council (sent last fall), one fact moves front and center.
The systemic risk regulator/council will require the power to compel the disclosure of loan-level detail from the billing and collection systems of the servicers that perform that function on a daily basis.
This is a database that must be built from the ground up and administered free of conflicts of interest so that both regulators and investors can deem the information trustworthy. The notion that the database could be pieced together from eight other databases maintained by different regulators is monumentally flawed. It would take years to overcome the technical problems of integrating the different systems and even then there would have to be so many compromises to make the data acceptable that it could become useless. Such a solution would be a monstrous IT problem.
Building the system from the ground up has a distinct advantage. The systemic risk regulator would collect the data (preferably daily) from the various sources (e.g., billing and collection databases) and then perform standardization at the database level! As I have often written in the past year, this would be the "mother of all databases."
It would also help us avoid a future financial crisis.
The "mother of all databases" conceived and executed in this manner would have three major functions:
- It would permit the systemic risk regulator to identify early trends or positions that present an unacceptable risk to the financial system;
- It would help to restart securitization by providing investors (the buy side) with more timely and better information on structured finance securities, in effect leveling the playing field and bringing buyers back into the market; and
- It would present to other banks, investors and regulators greater transparency into bank solvency.
The European Central Bank is already looking to move in the direction of more access to loan-level detail and is seeking public comment regarding it and the type of data portal required to make it work. The U.S. legislative and regulatory effort is beginning to move in a similar direction.
While it would be preferable to have the systemic risk council headed by an independent director confirmed for a ten-year period and reporting to the Secretary of the Treasury (e.g., FBI/Attorney General), the current desire to have it headed by the Treasury Secretary is a good first step and does not prevent later fine tuning on this point.
For a somewhat testier response to this arrangement, see Calculated Risk's blog entry from Wednesday, which has this analysis:
I can just imagine a council in 2004 and 2005 led by ex-Treasury Secretary John Snow with Alan Greenspan as Vice Chair. Yeah, that would have worked well ...
The important part is to keep the council free from toxic ties to Wall Street.
And... to build the database. Without the "mother of all databases" and the authority to compel disclosure of the data, we will not be able to head off another financial crisis caused by opaque instruments and unbridled greed.
Author's Disclosure: none