Trump nominee for financial stability agency sought to eliminate it

This week, the Senate Banking Committee held a confirmation hearing for President Trump’s nominee to lead the Office of Financial Research. The nomination has received little press coverage and the nominee received only a few questions at the confirmation hearing.

But the fact that this nomination is flying under the radar is not surprising. The OFR is arguably the most important piece of the Dodd-Frank Wall Street Reform and Consumer Protection Act that is never discussed. Despite its lack of public attention, the OFR’s crucial financial stability role demands a leader willing to aggressively execute its lofty mission. Unfortunately, President Trump’s nominee to lead the OFR is more likely to defang and defund the agency than to strengthen it.

In the lead-up to the 2007-2008 crisis, financial regulatory agencies did not have a good grasp of how risks that were building across and outside of their specific jurisdictions could threaten financial stability. Regulators were not sharing sufficient data with one another and there were significant pockets of the financial sector where data was not available to any regulator. The Dodd-Frank Act sought to address this issue, in part, by creating the Office of Financial Research.

Andrew Harrer/Bloomberg

As Sen. Jack Reed, D-R.I., stated when he introduced a bill that would later morph into the OFR, “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 OFR was designed to be a cutting-edge financial stability research hub that could address data gaps, serve as an early warning system for emerging vulnerabilities in the financial system and generally support the newly-created Financial Stability Oversight Council.

In its first seven years, the agency developed new financial stability monitoring tools, conducted research on systemic vulnerabilities, assisted the FSOC in the designation process for nonbank SIFIs and advanced global data standards. To be sure, the OFR has struggled to overcome certain headwinds posed by the financial industry and other regulators. The agency has also refrained from using its powerful subpoena authority to obtain data from financial institutions and has allowed the Treasury Department to encroach on some of the agency’s statutory independence. Yet despite some of these difficulties, former OFR Director Richard Berner built up the agency from scratch and made progress towards realizing its mission.

But the immediate future of this crucial financial stability resource does not look promising. Under the influence of the Trump administration, the OFR’s budget was cut by 25% and the staff was set to be reduced by 38%. Because the OFR is funded through industry assessments — not government resources — these cuts did not save taxpayers a dime in direct spending. They merely prevent the agency from carrying out its mission. The agency has also ceased publishing certain updates like the Financial Markets Monitor and the general research output has dwindled compared to previous years.

President Trump’s nominee to lead the agency, Dr. Dino Falaschetti, seems like the wrong person to reverse this trend. Falaschetti most recently served as chief economist of the House Financial Services Committee for Chairman Jeb Hensarling, R-Texas. He was one of the architects of Hensarling’s Financial Choice Act, which was passed by the House in 2017 and would gut key pillars of the Dodd-Frank Act. One of the bill’s provisions is particularly noteworthy given Falaschetti’s nomination: Section 151 of the Choice Act repeals the OFR.
Someone who has fought to close the OFR’s doors should not be given the authority to lead it. As director, he will have the authority to effectively defund the agency and restrict its research output. If Falaschetti doesn’t think the office should exist, then giving him the chance to shut it down from within would be a serious mistake. His nomination is eerily similar to President Trump’s decision to name Mick Mulvaney as acting director of the Consumer Financial Protection Bureau — an agency Mulvaney voted to abolish and once called a “sick, sad” joke.

Instead of working to tear down the agency, the next director should aggressively exercise the OFR’s powerful authorities to enhance financial stability. First, the next director should undo severe budget and staffing cuts and look to further build the agency’s research and data capacity. Next, the director should use the agency’s subpoena authority to acquire data on segments of the financial sector where systemic risk-related data gaps remain. The hedge fund industry is one area where — despite new disclosures mandated by Dodd-Frank — data gaps persist. Specifically, the FSOC under the Obama administration identified potential financial stability risks and data gaps related to hedge funds that employ significant leverage — yet the OFR has not used its authority to address these concerns. The $5 trillion repurchase agreement (repo) market is another area where more aggressive data collection is needed. Regulators still do not have data on the entire repo market 10 years after it played a central role in the financial crisis.

Finally, the next director should support long-term, innovative research on emerging risks in the financial sector and on the next generation of tools that regulators can use to ensure the resiliency of the financial system. Much of the OFR’s work has focused on the causes of the 2007-2008 financial crisis and the policy response. While this line of research is important, the next director should place an emphasis on longer term projects that seek to look around the corner.

Based on the nominee set forth by the Trump administration to lead the agency, it does not look like the OFR will achieve its full potential anytime soon. Perhaps one day, under the right leadership, it will — if it’s not completely hobbled in the interim.