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Data Gathering and Financial Regulation Mark Allen CASE Research, Warsaw Slide 2 The financial crisis has been immensely expensive Cost of the financial crisis (percent of GDP, 2008-11) * Change in percentage points, 2007-2010 Slide 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 Slide 4 What caused the regulatory failure? Misplaced belief that financial innovation had reduced risks Insufficient appreciation of network fragility Complacency Possible regulatory capture Slide 5 Financial interconnectedness indexes Source: IMF Slide 6 Financial Interconnections Banking System (cross-border bank claims = $30 Trillion) = net bilateral exposures IMF Slide 7 Financial Interconnections Shadow Banking System (total claims = $25 Trillion) Coverage: Money market funds Mutual funds Hedge funds Pension funds Exchange traded funds = net bilateral exposures Source: BIS reporting banks, IMF Slide 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) Slide 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. Slide 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 Slide 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. Slide 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. Slide 13 "A densely interconnected highly leveraged financial system is intrinsically vulnerable to collapse." Robert Solow Slide 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 Slide 15 G-20 Regulatory Reform Agenda: Key Elements and Progress Slide 16 SIFI Framework: Tackling TBTF Slide 17 G-20 Regulatory Reform Agenda: Key Elements and Progress Slide 18 Dealing with Shadow Banks Slide 19 G-20 Regulatory Reform Agenda: Key Elements and Progress Slide 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 Slide 21 G-20 Data Gaps Initiative Area of concernFramework exists and data being reported Conceptual 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 Slide 22 Systemically Important Financial Institutions (SIFIs): Data Gaps Slide 23 SIFI data enhancement plan Slide 24 G-20 Data Gaps Initiative Area of concernFramework exists and data being reported Conceptual 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 Slide 25 Implementation of Data Gaps Initiative (as of September 2012) Framework needs developing Framework exists Real Estate PricesPrincipal Global Indicators Structured Products Leverage & Maturity Mismatches Public Sector Debt Government Finance Statistics Tail Risks in the Financial SystemSectoral 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 Swaps Financial Soundness Indicators Source: FSB, IMF: Progress Report on DGI Slide 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 Slide 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 Slide 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 Slide 29 Thank you!