The Office of Financial Research:
building a Research Community
Did they know what was going on?
Did they know what was going on?
Did they have a choice?
“If this crisis has taught us anything, it has taught us that risk to our
system can come from almost any quarter. We must be able to
look in every corner and across the horizon for dangers and our
system was not able to do that.” Secretary Geithner, opening
remarks, testimony to Senate Banking Committee, June 18, 2009.



Sen. Jack Reed, adequacy of data and risk analysis
systems for system-wide risks
We have good starting points, with regards to models;
we need better data, not clear what data.
This will require a new approach to finance/economics
research:
• Large Science approach – large scale, multidisciplinary teams
• Long-term sustained research effort that will iterate between better
models and need for better or more refined data.
 Loss
Distribution
• Tail events are rare – very little data
• Typically strong model assumptions
 Loss
Distribution
• Tail events are rare – very little data
• Typically strong model assumptions
• Liquidity Failures
 Can’t hedge
 No replicating portfolios
 Mean & Variance
 Game Theory
We are not in Kansas anymore
 Loss
Distribution
• Tail events are rare – very little data
• Typically strong model assumptions
• Liquidity Failures
• Scenario Analysis
 Linkages – rights, obligations
(Not Netting!)
 Granular Macro Economics
 Understanding Domino Risk
 Loss
Distribution
• Tail events are rare – very little data
• Typically strong model assumptions
• Liquidity Failures
• Scenario Analysis
• Economic Impact
 CaR – Credit at Risk
 DoL – Distribution of Loss
 Monitoring
health of Economy
 Regime shifting models
 Summaries reflecting stress
 Historical data
 Derivatives data
 Looking
for Black Swans
 Leverage measures
 Concentrations, Bubbles
 Liquidity capacity
 Linkages and Transparency
 Not
predicting cascading failures
 Determine
loss by counterparty
 Do
not predict probability of failure of
counterparties
 Do
not account for Linkages
 Proposed
 Part
by concerned citizens
of regulatory reform legislation
 Collect
system-wide transaction data
 Develop
analytic tools
Did they know what was going on?
Did they have a choice?
Can we afford to have this
happen again?
 Office
of the Comptroller of the Currency
workshop, Feb. 2009
• Proposed National Institute of Finance (NIF)
• Collect system-wide data, build analytic tools
and monitor systemic-risk
 Committee
to Establish a NIF
• Broad collection of concerned citizens
• Legislative Response – OFR is now law
 Office
of Financial Research works for the
Financial Stability Oversight Council
• Better data and analysis tools
• Long-term research
• Regulatory Commons
• Independent voice
 Two
components
• Data Center
• Research and Analysis Center
 Dodd
Frank Act is law
 Treasury
 Key
sets up initial OFR
Initiatives
• Reference data (Treasury’s current focus)
• Common computing and data infrastructure
• Build initial risk monitoring system
• Key long-term research efforts
• Investigate past crisis
 Organize
a Penn State Initiative
• Key long-term research efforts
 Conceptual models and mathematical models
 Identifying important areas of collaboration
 Seminar Series/Workshops
 University Center, NSF Funding?
 Potential
Benefits
• Future Funding
• Back-up data center
 Broader
Initiatives
(Other Universities and Industry partners)
 Initial analytic systemic risk systems
 Competitive Frameworks for comparison of systemic
risk systems
 Testing scenarios to prove how different technologies
could apply
 Cross-over of technologies that can be used for
systemic risk
 Maps of the financial system
 Demonstration of prototypes and feasibility studies
 International
Collaboration on Data
• Common reporting requirements in key markets
for market participants
• OFR standards offer a point for building
common standards
 International
Collaboration on Research
• International body help coordinate and facilitate
research across countries, in the public interest