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Data Gathering and Financial Regulation

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  1. Data Gathering and Financial Regulation Mark Allen CASE Research, Warsaw

  2. The financial crisis has been immensely expensive Cost of the financial crisis (percent of GDP, 2008-11) * Change in percentage points, 2007-2010

  3. 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

  4. What caused the regulatory failure? • Misplaced belief that financial innovation had reduced risks • Insufficient appreciation of network fragility • Complacency • Possible regulatory capture

  5. Financial interconnectedness indexes Source: IMF

  6. Financial Interconnections Banking System (cross-border bank claims = $30 Trillion) = net bilateral exposures IMF

  7. Financial Interconnections ”Shadow” Banking System (total claims = $25 Trillion) = net bilateral exposures Coverage: Money market funds Mutual funds Hedge funds Pension funds Exchange traded funds Source: BIS reporting banks, IMF

  8. 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)

  9. 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.

  10. “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

  11. 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.

  12. 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.”

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

  14. “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

  15. G-20 Regulatory Reform Agenda:Key Elements and Progress

  16. SIFI Framework: Tackling TBTF

  17. G-20 Regulatory Reform Agenda:Key Elements and Progress

  18. Dealing with Shadow Banks

  19. G-20 Regulatory Reform Agenda:Key Elements and Progress

  20. 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

  21. G-20 Data Gaps Initiative

  22. Systemically Important Financial Institutions (SIFIs): Data Gaps

  23. SIFI data enhancement plan

  24. G-20 Data Gaps Initiative

  25. Implementation of Data Gaps Initiative(as of September 2012) Framework needs developing Framework exists Financial Soundness Indicators Distributional Information Credit Default Swaps Financial and Nonfinancial Corporations Cross-border Exposures Securities Statistics Coordinated Portfolio Investment Survey (CPIS) Consolidation concepts Common Template for Global Network and G-SIFIs International Banking Statistics (IBS) Collection and Sharing of Data on Global Network Connections and G-SIFIs International Investment Position (IIP) Tail Risks in the Financial System Sectoral Accounts Leverage & Maturity Mismatches Government Finance Statistics Public Sector Debt Structured Products Principal Global Indicators Real Estate Prices Source: FSB, IMF: Progress Report on DGI

  26. 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

  27. 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

  28. 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

  29. Thank you!