OFR Director Berner Outlines Vulnerabilities of Financial Interconnectedness
Commentary by Steven Lofchie
Office of Financial Research (OFR) Director Richard Berner highlighted recent efforts by the OFR to (i) define, analyze and monitor vulnerabilities that arise from financial interconnectedness; (ii) establish data to monitor and evaluate these vulnerabilities; and (iii) determine the policy tools needed to mitigate and calibrate these vulnerabilities.
Director Berner stated that OFR's current initiatives are meant to:
- holistically examine securities financing transactions (noting a recent OFR publication, Reference Guide to U.S. Repo and Securities Lending Markets);
- assist the CFTC in improving the data quality collected by swap data repositories;
- improve the quality of financial data by developing the use of data standards, such as the global Legal Entity Identifier; and
- improve the quality of data available to evaluate risks in central counterparty clearinghouse operations.
Director Berner outlined future challenges of interconnectedness, including (i) developing metrics and tools to quantify and analyze operational risks, such as cybersecurity threats; (ii) sorting out benefits and costs from interconnectedness; and (iii) determining how to securely and appropriately share data for the benefit of policymakers and researchers.
He also described improvements in the policy toolkit to address vulnerabilities arising from interconnectedness (citing a handful of recent Basel banking initiatives), but noted that there is additional work to do to address vulnerabilities at non-bank financial intermediaries.
Director Berner's remarks were delivered at the OFR's third annual workshop on financial interconnectedness hosted by the Bank for International Settlements, the Netherlands Bank, the Deutsche Bundesbank and the Review of Finance.
Commentary
One can readily imagine other questions that seem more fundamental than those the OFR is now studying: what impact do low interest rates have on the conduct of financial institutions? What is the viability of the municipal and corporate pension plan system in a prolonged low interest rate environment? (See in this this regard page B1 of today's New York Times as to the likely insolvnecy of a major private pension plan?) How do the higher costs of financial regulation affect market structure and the competitive ability of small firms? Are the new financial regulations discouraging cross-border transactions? In the event of increased volatility in financial markets, will the clearing houses suck liquidity out of the financial system with higher margin demands?
Answers to any of the above questions might have posed challenges to the path that the regulators are now on. Rather than asking those questions, the regulators seem to have asked questions that are likely to yield answers that support their policies. The results will be so ambiguous that it is unlikely that any meaning can be drawn from them.