OFR Director Describes Data-driven Approach to Financial Stability Risks
Commentary by Steven Lofchie
Director of the Office of Financial Research ("OFR") James Martin described OFR's use of data-driven analytics to identify and address risks posed by the growth in the digital asset markets and by climate change.
In remarks at the 2022 Financial Stability Conference, Mr. Martin said that the OFR established a unique dataset for measuring the growth of the digital asset industry over the last several years and that this new dataset should be incorporated into traditional financial risk monitoring and analysis. He said that doing so would help to ensure that markets are resilient across the board. He said that the digital asset market growth is fueled by innovation, but warned that "unchecked or loosely regulated" innovation can pose significant threats to financial stability.
Mr. Martin highlighted the OFR's partnership with the Federal Reserve Board to develop a pilot program that uses data, high-powered computing and analytic tools to help ease the burden of processing the large volume of information used for climate change risk analysis. He said that because of the program's success, the OFR plans to make it permanent, which will provide a platform for additional financial stability research.
Further, Mr. Martin emphasized risks to Treasury market liquidity and noted OFR's recent efforts to learn more from the industry about the non-centrally cleared bilateral report market.
Mr. Martin said that the OFR will continue to work to identify information gaps in emerging markets and to facilitate research to help close those gaps.
Commentary
The Federal Government should focus on potential shocks that may create immediate financial calamity or on intermediate trends that are so obvious that they are discoverable by drawing straight lines.
Here are some risks that seem of obvious import to the financial system, both short and intermediate term: (i) supply chain failures; (ii) energy shortages; (iii) a major cyberattack; (iv) inflation; (v) the federal deficit combined with increasing pressures on entitlements; (vi) a shrinking work force; (vii) the drop in educational achievement resulting from, among other things, the closure of schools during the pandemic; (viii) the possibility that SOFR, which is a risk-free rate, may not turn out to be a good replacement for LIBOR, which is intended to incorporate risk; (ix) the potential exodus from cities caused by the ability to WFH and the increased fear of crime. The last one in particular may be expected to have a significant negative impact on low-income families.