2/04/2010 — 

Mr. President, today I introduce the National Institute of Finance Act of 2010, which would create an Institute to provide our financial regulators with the data and analytic tools needed to prevent and contain future financial crises.

   By establishing this new Institute, my bill offers the foundation for a new approach to financial regulation that would better protect Americans from the financial storm they are currently struggling through.

   Over the past 18 months, we have learned that our regulators did not have the appropriate tools or knowledge to address risks that cut across different markets and sectors of the financial system. The recently passed House financial regulatory reform bill and other proposals take an important step in filling this huge regulatory gap by establishing centralized systemic risk oversight. However, any new regulatory structure will be ineffective unless we also equip it with a strong, independent, and well-funded data, research, and analytic capacity to fulfill its mission.

   The idea for the National Institute of Finance has been endorsed by a dedicated group of the Nation's top academic researchers, economists, and statisticians--including Nobel Laureate Harry Markowitz--who recognize that any financial regulatory reform is incomplete without a much stronger data, research, and analytic capability.

   To further explore these issues, I asked the National Academy of Sciences in August to study the data and tools needed for systemic risk regulation. Among the Academy's findings: that the U.S. currently lacks the technical tools to monitor and manage systemic financial risk with sufficient comprehensiveness and precision. That market

   efficiency, in addition to regulatory capacity, would be enhanced by improved intelligence about what is going on in the system as a whole. And that existing capabilities are not a sufficient foundation for systemic risk management.

   The bill I introduce today addresses these significant weaknesses by creating the National Institute of Finance, whose mission will be to support the community of financial regulatory agencies by collecting and standardizing the reporting of financial market data; performing applied and essential long-term research; and developing tools for measuring and monitoring systemic risk.

   The Institute would house a data center that would collect, validate and maintain key data to perform its mission, including a central database to map the interconnections between financial institutions, along with details on their transactions and positions, and their valuation of their assets and liabilities. By working with banks and other firms to standardize the format of such data and by providing standard reference data, such as databases of legal entities and financial products, the Institute would reduce the costs to regulators and financial institutions from the currently fragmented and disorganized systems used to collect and store such information.

   Second, the Institute would contain a research and analysis center to develop the needed metrics and then measure and monitor systemic risk posed by individual firms and markets. This new Institute would house some of the country's most-well-respected researchers to collect and analyze the data needed to understand what is happening in our financial markets, to conduct investigations of market disruptions, and to work with regulators to identify new and dangerous trends.

   It would conduct and help coordinate applied research on financial markets and systemic risk, a field that is not well-represented right now at the Federal Reserve or within our other regulatory agencies. It would also develop the metrics and tools our regulators need to measure and monitor systemic risk and help policymakers by conducting studies and providing advice on the impact of government policies on systemic risk.

   Finally, the Institute would provide independent periodic reports to Congress on the state of the financial system, ensuring that we are kept apprised of the overall picture of our markets more effectively than we have been in the past. The domino effect caused by the recession will continue to cripple Rhode Island families and Americans across the country unless we put in place a strong new infrastructure and shore up our financial markets.

   I hope my colleagues will join me in strengthening our financial system by cosponsoring this legislation and supporting its passage.