WASHINGTON Dec 22 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 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
"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.
"The office has to raise its game," Reed said of the asset
Its director, Richard Berner, a former economist at Morgan
Stanley and Mellon Bank, wants time. He told Reuters the OFR is
still new and recruiting top talent.
The agency has roughly 185 staff members, and Berner hopes
to have 300 in 2015. Its fiscal 2013 budget, financed through
fees on big banks, is about $78 million.
The office takes annual looks at simmering stability risks
and, observers say, has made progress tracking financial
"Now that we are starting to get some critical mass on the
research side, the data side and the technology side, the
progress is coming faster," Berner said in an interview. "The
accomplishments are substantial."
The idea for the research office took shape at a February
2009 conference on statistics in bank regulation. Participants
decided regulators lacked the data to anticipate the 2007-2009
crisis and needed a research powerhouse, said Arthur Small, an
economist who joined the group shortly after the conference.
"We felt a great sense of urgency," Small said, to make sure
the idea got into the Dodd-Frank law.
One member gave the 2009 presentation at the American
Enterprise Institute, and the group spoke with Martin Gruenberg
of the Federal Deposit Insurance Corp, Neal Wolin, then a top
official at the U.S. Treasury, and others. Senator Reed of Rhode
Island pushed to get the research office into the law.
Dodd-Frank gave the office two major tasks. One is to
standardize financial transaction data so regulators can
eventually monitor asset bubbles as they form.
The other is to support the Financial Stability Oversight
Council, or FSOC, a group of regulators that watches risks. OFR
studies are meant to inform the FSOC's policy decisions.
The OFR's first big project came in 2011, when the FSOC
wanted to know if the activities of asset managers posed risks
to financial stability.
These firms buy stocks and bonds on behalf of investors and,
together, handle trillions of dollars in assets. If the FSOC
dubbed a manager "systemic," it would face costly mandates to
rely less on debt and be regulated by the Federal Reserve.
At the time, the OFR was understaffed and had few in-house
markets experts. The Federal Reserve Bank of Boston loaned the
OFR a staffer with asset management expertise to help out, a
Boston Fed spokesman said.
Economists from all of the federal regulators also agreed to
participate in early-stage meetings to develop the report,
except the U.S. Securities and Exchange Commission. Its
economists did not respond to email invitations or attend at
brainstorming sessions, even though the SEC is the industry's
main regulator, two people familiar with the matter said.
The SEC did not participate early on because it had limited
resources, and officials there were also skeptical about the
office's level of experience, two other people said.
But when the OFR eventually circulated drafts, SEC lawyers
tried to edit the report. They thought it showed little
understanding of the industry, three people told Reuters.
The OFR toned down and shortened the final report in
September 2013, several people said, but the study raised
concerns about managers borrowing to boost returns or crowding
into the same assets at once.
SEC officials remained unhappy and asked for public feedback
on the study, a sign of criticism in regulatory circles.
The asset management industry said it was misleading and
Berner has since said the SEC was involved "from beginning
to end." "Their fingerprints are on the report as well," he said
at a recent event in Washington.
SEC Chair Mary Jo White asked about the kerfuffle at a
November conference, said the SEC shared expertise. But "at the
end of the day, it is obviously the OFR's study," she said.
A spokesman for the SEC declined to comment beyond White's
Data sharing has been a wider problem.
It took the OFR nearly two years to access Federal Reserve
data on overnight funding methods, or "repo" loans, that
regulators think fueled the financial crisis, a person familiar
with the matter said.
The Fed took so long because it wanted to ensure the data
would be secure, the person added.
The Fed, which declined to comment, is notoriously careful
about sharing bank data lest it accidentally become public. It
requires memoranda of understanding, or MOU, detailing
safeguards for sensitive data.
The OFR now is early into a similar effort to get data on
annual stress tests run by the Fed. Dodd-Frank directed the OFR
to weigh the efficacy of the tests, which consider how banks
would fare in a crisis. But it does not have the Fed data yet.
"The OFR should do whatever it takes to gain access to the
data collected by the Federal Reserve, the Office of the
Comptroller of the Currency and the Federal Deposit Insurance
Corp to execute the Dodd-Frank mandated stress tests," the
office's outside advisory group wrote in August.
Berner said the office would seek an MOU with the Fed to
share the data, but to date it has not made a formal request.
The office is still in its early stages, and many of its
supporters remain optimistic about the office's potential.
They point to the OFR's work on an international effort to
create unique identifiers for financial institutions that would
be used like barcodes to track activities.
"My analysis is that without the OFR, that probably just
wouldn't have happened," said Small, the economist who helped
push for the office. "That's a first, critically important step
in making the financial system machine-readable."
But the OFR is also still working to staff up and, at times,
struggles to compete for talent within the government.
The Fed, which has huge cachet among economists looking for
government experience, launched its own research unit around the
same time as the OFR. It pays better, too.
The OFR's advisory panel said a PhD making around $200,000 a
year at the Fed would get less than $120,000 at the OFR. The OFR
needs to boost pay, the outside group said, or "it is doubtful
that the OFR will be able to attract the talent that it needs to
fulfill its research mission."
Berner said the office's pay practices are evolving, and it
is "making the changes we need to make" to hire more.
Still, the unit needs more top-tier talent and critical data
if it is to spot the next crisis before it lands.
"The OFR has a strong potential. It's unencumbered by
regulatory responsibilities. It has funding. It has access,"
said Andrei Kirilenko, a former chief economist at the Commodity
Futures Trading Commission who is now at the business school for
the Massachusetts Institute of Technology.
"But for a variety of operational reasons, it seems to have
not been able realize its potential," he said. "I'd really like
to see this office succeed and have it become a center of
excellence for systemic risk."