NEW YORK (Reuters) - A gargantuan database of billions of financial instruments is being proposed by a Federal Reserve staffer to help regulators prevent risky behavior that could threaten the entire banking system.
The proposal, by Philadelphia Federal Reserve Bank economist Leonard Nakamura, has garnered attention elsewhere in the Fed System as the central bank weighs what tools it will need for its likely new role overseeing the largest financial institutions.
Financial reform legislation nearing conclusion in Congress is expected to name the Fed the regulator of systemically risky firms, with a council of regulators tasked with spotting systemic risks.
In recent workshops, Nakamura has argued that the monitoring of financial instruments would complement regulation of financial institutions.
If regulators had had a better understanding of financial instruments’ risks and who held them, they could have acted more aggressively before the 2008-09 financial crisis and have been more informed once the crisis took hold, he argues.
“Such a database would have been of material value to U.S. regulators in ameliorating the recent financial crisis and will be of aid in understanding the potential vulnerabilities of an innovative financial system in the future,” he wrote in a white paper obtained by Reuters.
The fragmented nature of the available information made it hard to get a read on firms’ exposure to risk during the financial crisis and the uncertainty fueled panic.
Nakamura suggests a U.S. systemic risk regulator could be a central data-keeper for U.S. financial instruments.
Financial instruments would be given permanent identifiers so that they can be linked from data set to data set, he said.
Nakamura’s proposal would cover every direct claim against any legal entity, including firms and households, and would also cover derivatives contracts. A similar proposal by academics would only focus on large financial institutions.
But some within the Fed system worry that the enormous database may be too ambitious and costly.
“It’s definitely fueling discussion,” said Joseph Haubrich, head of the Banking and Institutions Group at the Federal Reserve Bank of Cleveland’s research department.
But Haubrich warned it could create a reporting burden for financial firms, or simply create a data overload for supervisors.
“I wonder if we’d know what we’d do with all that information if we got it,” Haubrich said. New technology would certainly be needed to spot trends in the data, he said.
A recent example highlights the perils of data overload: Last week, the commission investigating the causes of the financial crisis blasted Goldman Sachs for swamping the panel with five terabytes of data — or billions of pages the panel’s staff couldn’t hope to work their way through.
Haubrich said knowing who owns what wouldn’t necessarily help regulators predict how a crisis will evolve.
“It’s not entirely obvious to me that knowing what everyone is holding would mean we could necessarily then figure out what the pattern of contagion could be,” Haubrich said.