Financial data enables the economy to function. You depend on it when you open a bank account, apply for a loan, or buy a mutual fund share. Banks depend on it when they lend or borrow, buy or sell assets, or evaluate their own financial health and the risks they face. And the Federal Reserve and other regulators need it to evaluate systemic risks and manage financial crises.
But financial data has serious weaknesses, and those weaknesses became apparent once again during the COVID-19-induced market disruption in March.
As markets tumbled, strange things happened. There was a massive and unprecedented run on U.S. Treasury bonds, spurred in part by hedge funds unwinding billions of dollars of highly leveraged trades. Investors pulled billions of dollars out of prime money market funds and piled even more into safer fixed-value government funds. Many investors also rushed to redeem open-ended mutual-fund shares, and dozens of these funds in the UK and Europe temporarily shut their gates to such requests.
“Better information may have allowed for a more targeted response during the crisis and a more fruitful assessment afterward.”
Governments responded with shock and awe. Central banks injected hundreds of billions of dollars into markets in a matter of days. Fiscal support was in the trillions. Markets recovered surprisingly quickly, even as the health crisis continued and worsened.
But better data would have allowed for a more effective and efficient response. The data the official sector monitored were inadequate to gauge the sources and transmission of risks. A Fed official recently noted the data gaps that remain in Treasuries and related financing markets. Data would have been helpful, specifically, to evaluate the role a few hedge funds had played. Weaknesses in data prevented regulators across the world from getting a system-wide perspective on what was happening, according to a Financial Stability Board report last month. In short, better information may have allowed for a more targeted response during the crisis and a more fruitful assessment afterward.
Much of the blame can be placed on our fragmented regulatory framework. Different regulators collect different data for different purposes, follow different standards, and don’t always share information with each other.
These issues aren’t new. The global financial crisis of 2007-09 also emerged from corners of the markets that regulators hadn’t been tracking. In response, Congress created the Financial Stability Oversight Council (FSOC), a council of federal financial regulators chaired by the Treasury secretary, to get a better handle on systemic risks, and an Office of Financial Research (OFR) to support it. The OFR’s job is to fill blind spots about “who owes what to whom” across the financial system. It can set data standards, collect financial data, and conduct research and analysis on systemic risks.
My recent Brookings paper argued that the administration should prioritize data when vetting candidates for top financial regulatory positions. Every FSOC agency leader needs to be on board to solve collective-action problems. The 2018 Evidence Act, meanwhile, requires each agency to have a chief data officer and a data strategy.
Next, the administration should put the OFR and FSOC in charge of developing a systemwide financial data strategy, working closely with all of the regulators.
That strategy should, first, set priorities for data gaps the regulators will fill. Financial institutions, investors, regulators, and researchers need granular, high-quality data to understand what’s going on, across a panoply of financial markets.
Second, all FSOC member agencies should commit to following the same data standards. Data within firms and across diverse firms and markets need to follow standards so they can be compared and aggregated for analysis.
Third, FSOC members should commit to better data-sharing among themselves. A simple starting principle could be that every agency should be able to get the data it needs, in a comprehensible form and on a timely basis, to execute its statutory mission. No one has all the data they need to do their job alone. Data-sharing needs to extend to outside investors and researchers, so they can provide their essential contributions to market efficiency and our understanding of how the world works.
Fourth, FSOC members should work together to implement new technologies to improve data collection and management. The explosive growth in granular data creates challenges and opportunities. Regulators across the world have embraced “SupTech,” the use of technology to improve their ability to monitor, assess, and analyze risks in financial markets and institutions. The FDIC recently invited 20 tech firms to participate in a competition to update the call reports that banks file. This is a good start down a long road.
These are ambitious goals, but this is the moment to focus on them. As the saying goes, let’s not let this crisis go to waste.