A group of investors issued a report yesterday that criticized the Obama administration’s plan to have the Federal Reserve operate as the systemic risk regulator. The Investor’s Working Group consists of a high-octane set of investors, including CalPERS, Capital Group and GMO, as well as academics and journalists, and it is chaired by former SEC chairs William Donaldson and Arthur Levitt.
There are lots of interesting ideas in the report, but, most significantly, the report argues that the Federal Reserve as systemic risk regulator has “serious drawbacks”. It cites the “potentially competing responsibilities" from monetary policy, to managing the payments system. More importantly, the report cites the recent regulatory failures of failing to police mortgage underwriting and to impose suitability standards on mortgage lenders.
Whether it’s the Fed or some other entity that ends up being responsible for systemic risk regulation, a new information architecture will be required to surface up the right information to the systemic risk regulator. The Investor’s Working Group has suggested that the regulator “should have the authority to gather all information it deem relevant to systemic risk”. Such an information gathering exercise will not be a trivial effort. The ORX has some experience with that, and the systemic risk regulator would presumably be looking for timely information about positions, counterparties and activity. The more the information requests align with current operational reporting at banks and other financial services institutions, the easier it will be to implement this new reporting requirement. This alignment is something ORX has learned is important. The reporting requirement alone is an argument for an omnibus approach to financial services regulatory reform, because surely there will be other reporting requirements coming out of the regulatory reform process. Let’s hope there’s a coordinated approach here; otherwise, potential reforms could be very expensive to implement and fail to deliver as promised.