Did they know what was going on? Did they have a choice?

Did they know what was going on? Did they have a choice?

Office of the Comptroller of the Currency workshop, Feb. 2009• Proposed National Institute of Finance (NIF)• Collect system-wide data, build analytic

tools and monitor systemic-risk

Committee to Establish a NIF • Broad collection of concerned citizens• Legislative Response – OFR is now law

Office of Financial Research works for the Financial Stability Oversight Council • Better data and analysis tools• Long-term research• Regulatory Commons• Independent voice

Two components • Data Center• Research and Analysis Center

Data Center • Reference data

Financial Companies Financial Instruments

• Reporting standards • Collect system-wide, granular data (positions)• Keep data secure• Share data –

Member Agencies General Public

Research and Analysis Center • Develop monitoring systems (financial stability)• Measure and report on financial stability• Evaluate stress-tests• Policy advice• Best practices in risk management• Conduct, coordinate and sponsor research• Investigate and report on financial disruptions• Share tools and findings with member agencies

Authority of the OFR• Set reporting standards• Require data (subpoena power)

Independence of the OFR • Director appointed by President for fixed term• Director makes key decisions (budget, hiring)• Director testifies without prior review• Funded by Fed first 2 years, after that by

large financial institutions 50b+

What would we do if data and resource barriers were removed?

Two time frames• Short-term (2 years)

Initial risk monitoring efforts Existing or easily obtained data

• Long-term (2+ years) Research projects Granular (position) data

Know it when you see it?

Intermediation markets break down, impacting broader economy

Disruption that requires Gov. intervention

Origins of stress or shocks• Aggregation, crowded trading, leverage, bubbles• Environmental, geopolitical or economic events

Propagation of shocks • Interconnections and counterparty network• Domino Effect and Repeated Fire Sales

Breakdown of markets• Flight to safety, collapse of capacity

Primary OFR Objectives • Establish reference data• Achievable risk-metrics, integrated into an

initial ‘risk dashboard’• Establish a vibrant research capacity

Build up of risk – looking for triggers• Models based on existing data, default• Bubble identification, monitoring leverage• Aggregation in exposures

Network propagation• Understanding the reaction function• Pre-reference data network – marks, risk reports

Market breakdowns• Mapping existing market structure and capacity• Post-mortem of last crash

$3T CDS Notional outstandingAIG goes down, who else goes?

$185b Gov. Loans

Loss Distribution• Tail events are rare – very little data• Typically strong model assumptions

Loss Distribution• Tail events are rare – very little data• Typically strong model assumptions• Liquidity Failures

Can’t hedge No replicating portfolios Mean & Variance Game Theory

We are not in Kansas anymore

Loss Distribution• Tail events are rare – very little data• Typically strong model assumptions• Liquidity Failures• Scenario Analysis

Linkages – rights, obligations (Not Netting!) Granular Macro Economics Reaction Function

Loss Distribution• Tail events are rare – very little data• Typically strong model assumptions• Liquidity Failures• Scenario Analysis• Economic Impact

CaR – Credit at Risk DoL – Distribution of Loss

Confidence in the market is gone, no-one knows who is solvent

Flight to quality (US Treasury), credit markets freezeHow long can companies ‘hold their breath’?

Collecting network data• Collect self-reported valuations (or marks) and risk

summaries (derivatives or expected cash flows, by market shock) for each position, by counter-party (OFR glues this together). Complement with OTC – trade warehouse data…

• Establish unique identifiers – collect self-reported data (less glue needed).

• Have firms provide positions to third-party vendors, who then report to the OFR (more consistent)

• Have firms report positions to OFR.

Capacities developed or enhanced (longer-term)• Risk dash board • Interactive scenario analysis: ‘flight simulator,’ ‘war

gamming’• Identify rogue traders or rogue institutions.• Detect and test the effect of a new financial instrument

or new trends in financial behavior• Facilitate secure distribution and sharing of data• Make appropriately anonymized data available to public• Crisis response teams• Post mortem teams in the style of the NTSB• Identify the questions that no one is thinking about, but

that the OFR should be thinking about

Competitive OFR risk dashboard

Ongoing DevelopmentOngoing Development

Initial EstablishmentInitial Establishment

Modeling CompetitionModeling Competition

Evaluation

Evaluation

Visualization CompetitionVisualization Competition

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Prototype TeamsPrototype Teams Primary

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Risk Dashboa

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Risk Dashboa

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Related policy discussions• Review establishing risk dashboards• Year 2 report to Congress

• Establish a research management approach/infrastructure – portfolio of approaches

• Engaging the broader research community

• Legal scope of companies who must report• Identify other data initiatives• Data security, management and disclosure• International data relationships (reference data, reporting

standards, regulatory data)

Dodd Frank Act becomes law

Treasury sets up initial OFR

Key Initiatives• Reference data• Common computing and data infrastructure• Build initial risk monitoring system• Key long-term research efforts• Investigate past crisis