Scholar argues that U.S. financial regulators need a revived research agency.
Acting on promises of deregulation and the shrinking of federal bureaucracy, the Trump Administration reduced staff and slashed operating budgets for many federal agencies. But in the words of Nietzsche, adapted by Kelly Clarkson, “What doesn’t kill you makes you stronger.” The start of Biden’s presidency could initiate a rebirth in federal administration.
The remains of the Office of Financial Research (OFR) present a golden opportunity to make a “decimated” agency work to the benefit of financial regulators and the economy, according to a new paper by Hilary J. Allen, an associate professor of law at the American University Washington College of Law. Allen argues that although the OFR never achieved its full potential under the Obama and Trump Administrations, it could be a central hub of financial, scientific, and technological expertise in the Biden Administration.
In the wake of the 2008 financial crisis, the U.S. Congress created the OFR within the U.S. Department of the Treasury to serve as an “early-warning system” for severe financial risk by closing gaps in data between regulators. The OFR interacts with, consolidates data from, and provides recommendations to the financial regulators in charge of promoting financial stability.
Or at least it was supposed to do these things. Allen contends that the Obama Administration first failed to empower the OFR—partially because of reluctance by then-Treasury Secretary Timothy Geithner and partially because of partisan opposition and politicization.
Then, the Trump Administration actively hobbled the agency by reducing staff and resources. The OFR reduced its own autonomy and budget by moving away from fees assessed on the financial industry and toward congressionally appropriated funds—a change that placed the OFR at the mercy of legislators’ whims. As a result of these contractions, the OFR largely abandoned major initiatives, such as the Financial System Vulnerabilities Monitor.
Allen suggests that the Biden Administration faces an opening for reconstruction by revitalizing its budget and resources and shifting its focus. The OFR traditionally played the role of data-gatherer, but its authorizing text in the Dodd-Frank Act also points toward a broader application of its research potential.
Climate change and financial technologies could pose unforeseen risks to the financial system. New, extreme weather patterns can physically destroy the value of loans and investments, and emerging financial technologies may operate too quickly and automatically to manage risk before it becomes systemic. Allen envisions the OFR relying on experts in these fields alongside the traditional economists, lawyers, and accountants.
Allen proposes that the agency could become something of an independent clearinghouse for other federal agencies instead of solely a research body assisting financial regulators. With experts from different fields fostering a new culture around data-driven policy in the OFR, other agencies might not need to develop their own internal, siloed subdepartments that compete against other agencies for talented analysts.
Financial institutions, however, can afford to price out the federal government as the employer of data scientists, programmers, and even policy experts, and tech companies such as Google can crowd the hiring space for engineering and computer science graduates.
To compete with the private sector, the OFR could start an academic fellowship program—a device anticipated by the Dodd-Frank Act—to draw in more experienced talent. It could also emphasize the value of public service to capture the attention of younger, public-minded millennials less interested in working for large corporations.
Allen suggests that in addition to strengthening expertise, the OFR should foster a cultural change in financial regulation. To confront the emerging risks of a modern, interconnected, and digital financial system, the OFR needs to develop a mindset of humble innovation, argues Allen.
For example, Allen challenges a revitalized OFR to approach data assessment carefully, remaining skeptical and informed on the data and models used. In her view, the OFR should serve as a foundation for interrogating conventional wisdom on how crises begin and how instability spreads throughout the entire system.
But for the OFR to become a centralized, reinvigorated hub of expertise for the federal government, its location needs to change. Allen says that the OFR should move out of the Treasury Department into a fully independent role. At the very least, the OFR could be placed within the Federal Reserve System, in a structure similar to that of the Consumer Financial Protection Bureau.
Relocating the OFR, however, would require new legislation, and Allen doubts whether such a bill would have enough support in Congress. In lieu of legislative reform, a supportive Treasury Secretary could provide a viable alternative for maintaining some independence for the OFR.
If given enough resources, a renewed purpose, and independence, the OFR could effectively entice experts and kickstart the resurrection Allen imagines.