Insight: U.S. early warning system for financial crises gets low marks

Sun Dec 22, 2013 1:47pm EST
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By Sarah N. Lynch and Emily Stephenson

WASHINGTON (Reuters) - In June 2009, a small group of academics sent an envoy to a Washington, D.C., think tank to pitch their vision for a research office to help the nation avoid the next financial crisis.

The idea was to create a premier U.S. data powerhouse that would be a National Weather Service for financial storms, with up-to-the-minute information on transactions and the analytical juice to anticipate where systemic risks were quietly growing.

Their pitch worked. The Office of Financial Research was created within the Treasury Department, part of sweeping reforms in response to the worst financial crisis in decades.

But more than three years since the passage of the 2010 Dodd-Frank law, it is struggling to stay relevant.

Its first formal study, which found possible risks posed by the activities of asset managers like BlackRock Inc (BLK.N: Quote) and Fidelity, was panned by many as ill-informed and ripped to shreds by the industry.

The office must compete for top minds on a lower pay scale than some other agencies. And crucially, other regulators are hesitant to share data and expertise.

Even some of the office's key backers criticized its early work. The office, or OFR, needs a turnaround to avoid becoming a second-class bureaucratic operation, succumbing to regulatory turf wars and becoming unable to spot a brewing financial crisis.

"In order to be effective, OFR must have data integrity and thorough, accurate analysis," said U.S. Senator Jack Reed, a Rhode Island Democrat who drafted the legislative language that created the research unit.   Continued...

Richard Berner (R), Director of the Office of Financial Research for the U.S. Treasury and Brian Reid (L), Chief Economist with the Investment Company Institute, appear on the panel "Systemic Risk and the Asset Management Industry" at the Brookings Institution in Washington December 16, 2013. REUTERS/Gary Cameron