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Academics, Regulators and Industry Leaders Tackle Systemic Risk and Data Issues

Oct 07, 2011
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The Center for Financial Policy (CFP) co-hosted a two-day conference on systemic risk and data issues in partnership with the Salomon Center for the Study of Financial Institutions at the NYU Stern School of Business, the Center for Financial Markets at Carnegie Mellon’s Tepper School of Business, and the Fisher Center for Real Estate and Urban Economics at UC Berkeley’s Haas School of Business. The conference was inspired by the Dodd-Frank Act and the establishment of two new entities, the Office of Financial Center (OFR) and the Financial Stability Oversight Council (FSOC).

The conference was reflective of the commitment of these four institutions to play a central role in promoting research that informs policy. “The research papers were selected from a competitive pool from around the world and represented the best of academic traditions to inform policy on systemic risk and data issues,” said Lemma Senbet, Director of the Center for Financial Policy.

Government regulators, industry leaders and academic researchers, including a Nobel Laureate, gathered to collaborate and discuss how systemic risk builds up in the economy, how it is conceptualized and how it is measured. Moreover, data issues were addressed through a panel consisting of representatives from industry as well as a representative of the International Monetary Fund. A follow-up synopsis will be developed by the conference’s program committee for submission to regulatory agencies and Congress.

The Oct. 5-6, 2011 conference, held at the Ronald Reagan Building and International Trade Center in Washington, D.C., opened with a keynote address from Sen. Jack Reed (RI). Reed is a senior member of the Senate Banking, Housing and Urban Affairs Committee and was instrumental in pushing through key Wall Street reform legislation. He spoke about the importance of the Dodd-Frank regulation -- the most comprehensive financial reform legislation passed since the 1930s.

“The failure to effectively regulate the financial industry has created tremendous economic impact,” said Reed, pointing to the lagging economy and dismal jobs market. “We have to make sure Dodd-Frank is indeed effectively implemented.”

He talked about the Office of Financial Research and the Consumer Financial Protection Bureau, two new organizations created from the Dodd-Frank Act to give firms and regulators a real-time understanding of evolving risk in the financial system, to protect consumers, and to improve the regulatory efficiency of markets in the U.S. and around the world.

“If we set up a model that appears to be operating efficiently and effectively … then the rest of the world will follow,” Reed said.

The implementation challenges – and the reason attendees gathered for the conference – stem from the volume of data in the financial industry and how difficult it is for government and industry to coordinate the monitoring and absorption of data in a way that will mitigate systemic risk and head off future financial meltdowns.

“It’s very important that as academics, we not only write the research papers, but also engage with policy makers in Washington and leaders on Wall Street to come up with solutions for these kinds of financial and economic problems,” said G. “Anand” Anandalingam, dean of the Smith School.

Robert Engle, Nobel Laureate, spoke about his work with colleagues at NYU Stern on the failure of financial institutions and the option to institute more regulation to avoid having to bailout banks again in the future. He addressed how much capital a bank will need to ensure that tax-payers will not be on the hook for a rescue if we find ourselves in another financial crisis. In this spirit, Engle and colleagues have developed a method for monitoring and ranking financial institutions in terms of systemic risk.

Paper sessions focused on government itself as a source of risk, management and measurement of systemic risk, government guarantees and systemic risk, and mortgage data and incentives. One panel session focused on the volume and collection of financial data and how to sort through it while another session focused on the risks of the unregulated shadow banking industry, including a research presentation from Russell Wermers, associate professor of finance at the Smith School. This latter session also featured a keynote presentation on shadow banking and hedge funds from Andrew Lo, a professor at the Massachusetts Institute of Technology.

The conference wrapped up Thursday morning with a regulatory panel that highlighted views from high level officials from the five major regulatory agencies: Richard Berner, counselor to the Secretary of the Treasury, Office of Financial Research; Andrei Kirlenko, chief economist, Commodity Futures Trading Commission; Craig Lewis, chief economic and director of the Division of Risk, Strategy, and Financial Innovation at the Securities and Exchange Commission; and Art Murton, director of the Division of Insurance and Research at the Federal Deposit Insurance Corporation.

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