Regulators face “significant gaps” in understanding the financial system, and the lack of adequate data threatens stability, the U.S. Treasury Department’s research arm said.
The Office of Financial Research, in its inaugural report to Congress released by the Treasury today, said the gaps remain in analytical work by regulators because “none of them individually has authority to look across the entire financial system.”
The office, created by the Dodd-Frank financial-overhaul law, helps the Financial Stability Oversight Council in trying to prevent another crisis. The council, which includes Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke, analyzes potential threats to U.S. financial stability, including the European debt crisis.
“Gaps in analysis, data, and data standards represent threats to financial stability, and helping to fill those gaps” is part of the research office’s mandate, according to the report.
Manipulation of the London interbank offered rate “resulting from an opaque and closed process that allows a small number of firms to have significant influence -- poses significant risks to market integrity and investor trust, and will require continuing regulatory focus,” the OFR said.
Barclays (BARC) Plc, the U.K.’s second-largest bank, was fined a record 290 million pounds ($450 million) last month for attempting to rig Libor and the euro interbank offered rate to manage its reputation during the financial crisis and boost earnings before it. At least 12 banks, including Deutsche Bank AG (DBK), are being investigated for possibly manipulating Libor.
The research office also said better data are needed for regulators to adequately analyze the repurchase-agreement market.
“Understanding the repo market requires collection of transactions-level data about the repo market -- information that is presently unavailable to regulators,” the office said.
The research unit said it is working with U.S. regulators to get transaction, position and pricing information on credit- default swaps contracts.
“Even with these data in place, important data gaps will remain, including information about collateral and netting arrangements between CDS counterparties,” the OFR said. “As these markets are global, the OFR will need to acquire data relating to foreign transactions as well, particularly for affiliates of U.S. financial institutions.”
The collapse of insurer American International Group Inc. (AIG:US)’s financial-products unit in 2008 was an impetus for the creation of Dodd-Frank and FSOC. Collateral payments to banks that had bought protection from AIG through credit-default swaps led to a $182 billion taxpayer-funded bailout that gave the government a majority stake in the insurer.
The OFR also said it is “particularly interested in the forces that promote the migration of activity into unregulated or lightly regulated markets, the so-called shadow-banking system.”
In looking at failures of financial firms, the office said the collapse of MF Global Holdings Ltd. (MFGLQ:US) “is an important reminder that greater transparency and effective counterparty risk management are essential principles to counter the risk of contagion,” the OFR said.
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