Fed Wants Banks’ Loan-Level Data to Prevent Meltdown Repeat

Federal Reserve Board Governor Daniel Tarullo urged lawmakers Friday to craft reform legislation that would give regulators the authority to collect a broader range of data from lenders, including details of their loans and securities. It’s insight the governor says is needed to[IMAGE]accurately assess large financial firms’ risk and ward off another crisis where the collapse of any one institution sends the system into a tailspin â€" as was the case when Lehman Brothers went under in 2008.

“The recent financial crisis revealed important gaps in data collection and systematic analysis of institutions and markets,” Tarullo said in ""prepared testimony"":http://www.federalreserve.gov/newsevents/testimony/tarullo20100212a.htm before a subcommittee of the Senate Banking Committee. “Remedies to fill those gaps are critical for monitoring systemic risk and for enhanced supervision of systemically important financial institutions, which are in turn necessary to decrease the chances of such a serious crisis occurring in the future.”

Tarullo explained that the Fed has already initiated some new data collection and analytical efforts in response to the latest financial meltdown â€" including loan-level details on banks’ largest exposures to other banks, nonbank financial institutions, and corporate borrowers. The central bank has also begun collecting data on lenders’ trading and securitization risk.

“The Federal Reserve has made large investments in quantitative and qualitative analysis of the U.S. economy, financial markets, and financial institutions,” Tarullo said.

But Tarullo argued that most of the information the Fed collects from financial institutions relies on the firms’ voluntary cooperation. He noted that the Paperwork Reduction Act requires approval from the White House

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Office of Management and Budget in order to collect data from more than nine entities â€" red tape that Tarullo says “can delay the collection of important information in a financial crisis.”

He says regulators need information more frequently than banks’ regular quarterly reporting, as well as better quality data to develop a true picture of how tightly knit some of the largest firms are to one another and the risk those relationships and common exposures could pose.

Tarullo proposed making such information available across the spectrum of federal agencies, as well as private sector participants who could assess and ""raise their own concerns about financial trends and developments.""

“The current arrangement, in which different agencies collect and analyze data, cooperating in cases where a consensus exists among them, can certainly be improved,” Tarullo said. “Regulators have been hampered by a lack of authority to collect and analyze information from unregulated entities.”

The Fed governor told committee members that it would be up to Congress to decide which regulators should collect and analyze firms’ systemic risk data, noting that the collection and analysis function should be separate from “decision-making.”

Tarullo threw his support behind the creation of a council of existing financial regulators to monitor systemic risks and coordinate a federal response to emerging threats, rather than creating a new and separate agency for this purpose. Under this approach, he said, the supervisory and regulatory agencies would maintain most data collection and analysis. Coordination would be handed over to the council, which would also have authority to establish data collection requirements beyond those conducted by its member agencies.

The Fed governor’s proposal is in line with the financial reform bill already drafted by the House, which makes an inter-agency council responsible for policing systemic risk and maintains the central bank’s power to implement economic policies to that end.

The Senate Banking Committee, on the other hand, is in the process of putting its own financial reform legislation to paper, and it’s leaning in the opposite direction â€" creating a new agency to monitor widespread risk within the financial system and stripping bank supervisory duties from the Fed and other regulators.