Data Gathering and Financial Regulation

Mark AllenCASE Research, Warsaw

The financial crisis has been immensely expensive

Cost of the financial crisis (percent of GDP, 2008-11)

* Change in percentage points, 2007-2010

The crisis was primarily a failure of regulation

• Bankers are responsible for the stability of their bank (and a few other things)

• Regulators are charged with ensuring that the financial system is stable

What caused the regulatory failure?

• Misplaced belief that financial innovation had reduced risks

• Insufficient appreciation of network fragility

• Complacency• Possible regulatory capture

Financial interconnectedness indexes

Source: IMF

Financial InterconnectionsBanking System

(cross-border bank claims = $30 Trillion)= net bilateral exposures

IMF

Financial Interconnections”Shadow” Banking System(total claims = $25 Trillion)

Coverage:Money market fundsMutual fundsHedge fundsPension fundsExchange traded funds

= net bilateral exposures

Source: BIS reporting banks, IMF

Poor data did not cause the crisis

“The main reason why crises occur is not lack of statistics but the failure to interpret them correctly and to take remedial action.”

Claudio Borio (BIS)

Poor data did not cause the crisis

But– The crisis revealed how little the regulators

knew about the system.– Absence of data made it more difficult to

handle the crisis.

“If you put together all the subprime mortgages in the United States and assumed they were all worthless, the total losses to the financial system would be about equivalent to one bad day in the stock market …. The problem was that they were distributed throughout different securities and different places and nobody really knew where they were and who was going to bear the losses.”

Ben Bernanke

Poor data did not cause the crisis

But– The crisis revealed how little the regulators

knew about the system.– Absence of data made it more difficult to

handle the crisis.– Bank managements also knew less than

they should have about their firms’ risks.

Risk management practices within major firms were also inadequate

Senior Supervisors Report (2008) of 20 leading financial institutions:

“inadequate and often fragmented technological infrastructures that hindered effective risk identification and measurement.”

“Many firms lacked the ability to aggregate exposures, particularly gross and net exposures to institutional counterparties, in a matter of hours.”

“A number of firms also experienced difficulties integrating credit and market risks at the enterprise level and evaluating the two jointly in a consistent manner.”

"A densely interconnected highly leveraged financial system is intrinsically vulnerable to collapse."

Robert Solow

• “The step-up in our monitoring is motivated importantly by a shift in financial regulation and supervision toward a more macroprudential, or systemic, approach, supplementing our traditional microprudential perspective focused primarily on the health of individual institutions and markets.”

Ben Bernanke

G-20 Regulatory Reform Agenda:Key Elements and Progress

SIFI Framework: Tackling TBTF

G-20 Regulatory Reform Agenda:Key Elements and Progress

Dealing with Shadow Banks

G-20 Regulatory Reform Agenda:Key Elements and Progress

G-20 Data Gaps Initiative(November 2009)

Main elements• Build-up of risk in the financial sector• Cross-border financial linkages• Vulnerability of domestic economy to

shocks• Improving communication of official

statistics

G-20 Data Gaps InitiativeArea of concern Framework exists and data

being reportedConceptual framework to be developed

Build-up of risk in financial sector

• Financial Soundness Indicators • Credit Default Swaps• Securities

• Tail Risk in the Financial System• Aggregate Leverage and Maturity Mismatches; • Structured Products

Cross-border linkages

• Coordinated Portfolio Investment Survey• International Banking Statistics• International Investment Positions

• Global Network Connections• Systemically Important Global Institutions• Financial and Nonfinancial Corporations’ Cross Border Exposures

Vulnerability of economy to shocks

• Institutional Sector Accounts• Government Finance Statistics• Public Sector Debt• Real Estate Prices

• Distributional Information

Communicating official statistics

• Principal Global Indicators

Systemically Important Financial Institutions (SIFIs): Data Gaps

SIFI data enhancement plan

G-20 Data Gaps InitiativeArea of concern Framework exists and data

being reportedConceptual framework to be developed

Build-up of risk in financial sector

• Financial Soundness Indicators • Credit Default Swaps• Securities

• Tail Risk in the Financial System• Aggregate Leverage and Maturity Mismatches; • Structured Products

Cross-border linkages

• Coordinated Portfolio Investment Survey• International Banking Statistics• International Investment Positions

• Global Network Connections• Systemically Important Global Institutions• Financial and Nonfinancial Corporations’ Cross Border Exposures

Vulnerability of economy to shocks

• Institutional Sector Accounts• Government Finance Statistics• Public Sector Debt• Real Estate Prices

• Distributional Information

Communicating official statistics

• Principal Global Indicators

Implementation of Data Gaps Initiative(as of September 2012)

Framework needs developing

Framework exists

Real Estate PricesPrincipal Global IndicatorsStructured Products

Leverage & Maturity Mismatches

Public Sector Debt

Government Finance Statistics

Tail Risks in the Financial System Sectoral Accounts

Collection and Sharing of Data on Global Network

Connections and G-SIFIs

International Investment Position (IIP)

Common Template for Global Network and G-SIFIs

International Banking Statistics (IBS)

Coordinated Portfolio Investment Survey (CPIS)Consolidation concepts

Financial and Nonfinancial Corporations Cross-border Exposures

Distributional Information

Securities Statistics

Credit Default SwapsFinancial Soundness Indicators

Source: FSB, IMF: Progress Report on DGI

Key challenges facing the DGI

• Sharing G-SIFI data across borders• Producing quarterly government finance,

sectoral balance sheets and flow of funds data

• Domestic coordination of agencies and funding them adequately

• International harmonization of reporting standards

• New data demands

Legal entity identifiers (LEI)should make life easier

• Global system of unique identifiers• Initiative launched in November 2011• System now set up in record time• National implementation underway• Will facilitate counterparty risk

aggregation

Greater data provision brings advantages to market participants

• Classic public good in improving market stability

• Reduce uncertainty premia, with funding and equity benefits

• Facilitate better risk management• Better pricing and monitoring of risks

Thank you!