Resurrecting the Office of Financial Research

The Office of Financial Research (“OFR”) was created by the Dodd-Frank Act to help address the gaps in data availability and analysis that had hampered governmental authorities in their response to the financial crisis of 2008.  It was hoped that the OFR would serve as an “early warning system” that would detect emerging systemic risks through data collection and analysis, but the OFR never really had the opportunity to live up to its promise.  During the Obama administration, it suffered from an unsupportive Treasury Department and pushback from other federal financial regulatory agencies; under the Trump administration, the staff and … Read more

Operational Failures and Financial Crises

Past financial crises have been characterized by panics, runs, and restrictions on the availability of credit, and our crisis prevention measures (including capital regulation, deposit insurance, and the lender of last resort) have been adopted in light of this historical experience.[1]  These forms of financial stability regulation pay limited attention to operational risks, however, and as the technologies by which financial services are delivered become increasingly complex, operational risks may become a transmission mechanism as well as a source of financial distress.  In the future, financial crises may look more like a rolling blackout than a bank run.

Take … Read more

Regulating the Development of Driverless Finance

Before permitting driverless cars to operate on the open road without a licensed driver, lawmakers and innovators are working to ensure the safety not only of the passengers in those cars, but also of third parties – particularly other drivers and pedestrians.  Safety concerns figure much less prominently, however, in discussions about fintech and the increasing algorithmic automation of finance.  While the use of algorithms in finance is nothing new, the ubiquity, sophistication, and autonomy of financial algorithms has increased significantly in recent years with advances in computing power and data usage techniques.  Increasingly automated financial decision-making (a phenomenon that … Read more

The SEC as Financial Stability Regulator

The Financial Stability Oversight Council is the only regulatory body in the United States with an express mandate to “identify risks to the financial stability of the United States” and to “respond to emerging threats to the stability of the United States financial system.” But the FSOC is not a stand-alone agency; rather it is a council of regulators, lacking sufficient staff or resources to operate on its own.  To function, the FSOC must leverage the expertise of its component agencies – including the Securities and Exchange Commission.

There have been several subtle (and not-so-subtle) tugs-of-war between the FSOC and … Read more

The Possibilities and Practicalities of Financial Product Preapproval

Both parties to a complex financial instrument are likely to be sophisticated – this has led many to wonder why complex financial products need to be regulated at all. However, when the stability of the financial system is at stake, the parties to the transaction shouldn’t be the primary focus. Policymakers should instead be concerned with the externalities that complex financial products can generate for third parties.

Financial innovation – the process by which financial institutions develop new and complex financial products – increases the complexity of the financial system. Complexity is a destabilizing force: not only does complexity make … Read more