(Bloomberg View) -- After the 2008 financial crisis, Congress set up a new agency -- the Office of Financial Research -- with an ambitious goal: to ensure that regulators would never again be as blind as they were before and during the crash.
The agency hasn’t lived up to expectations, and the Trump administration is apparently planning to scale it back. Here’s a better idea: Make the OFR work like it was supposed to.
The crisis revealed just how essential good information is. During the subprime-mortgage boom, regulators couldn’t properly track defaults or leverage. They couldn’t see how various parts of the financial system were linked, or where new derivatives had amplified and concentrated risk. As a result, they failed to recognize the scale of the oncoming disaster.
The OFR was meant to put this right by supplying the missing data and analysis to the newly created Financial Stability Oversight Council, which is responsible for monitoring systemic risk. Congress gave it special privileges and powers. The office is financially independent -- funded through bank assessments, not congressional appropriations -- and it’s exempt from civil-service pay scales. If it can’t get the information it needs from other agencies or companies, it can issue subpoenas.
That looked good on paper, but it hasn’t worked well in practice. Other agencies have been slow to share data, the OFR has been reluctant to issue subpoenas, and the FSOC can’t demand cooperation. The office has published some useful research, shed light on short-term lending markets, and helped develop global data standards, but it’s still far from providing the financial early-warning system that its creators envisioned.
With financial markets showing signs of excess, now would be a good time to redouble the OFR’s efforts. That would start with appointing a leader to replace Richard Berner, who stepped down late last year. Congress should give the FSOC direct authority over the OFR (currently part of the Treasury Department) and the power to demand information from relevant agencies. In addition, those agencies should have financial stability added to their mandates, where that isn’t already the case.
Rather than strengthening the OFR, the Trump administration is undermining it. Treasury officials have reportedly said that the OFR’s budget will be cut by one-quarter and staff by more than a third. Already suffering from low morale, the OFR’s staff will now be more interested in finding new jobs than in seeking out systemic threats and raising red flags.
This is shortsighted. Regulators can’t do their jobs if they don’t know what’s going on. The OFR should be revived, not dismantled.
--Editors: Mark Whitehouse, Clive Crook.
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