Fed Paper: Regulators Should Act Like Intelligence Analysts
Regulators should adopt a more dynamic approach in by economic data in order to help prevent a new financial crisis, a U.S. Federal Reserve paper said Monday.
The paper, which was co-authored by Fed Vice Chairman Donald Kohn, argues that combining macroeconomic data showing trends like the large rise in household debt with specialized data, such as borrowers’ solicitations showing the rapid decline of underwriting standards, may have helped supervisors spot the crisis earlier.
Supervisors should act like intelligence analysts, who commence by looking at grainy satellite metaphors, which the paper compares to aggregate data. The supervisor should then follow up by bringing other resources to better know the full picture, the paper says.
“We believe that such coordination, with the analysis of aggregate data chief to the identification of those areas where work with more-specialized data should be targeted, should be a key aspect of the paradigm in future financial stability work,” the paper says.
The 42-pages paper will be presented at the fifth European Central Bank conference on central bank statistics, which is slated to take house in Frankfurt on Thursday and Friday.
In the wake of the crisis, financial supervisors and policymakers are working to expand and increase data collection. But that is only part of the process in developing ahead of schedule-warning system to prevent future crises, the Fed paper argues.
“More fundamental, in our view, is the need to use data in a uncommon way — in a way that can deliver more flexibility in targeting than static data collection can allow,” the paper says.
An approach relying on expanded collection of aggregate data followed by more-targeted and specialized information “could have been helpful in the period chief up to the recent crisis,” according to the Fed paper.