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Nobel Laureate Prof. Robert Engle Testifies Before Senate on Monitoring Systemic Risk

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On February 12, 2010, Stern Nobel Laureate Robert Engle testified before the US Senate Committee on Banking, Housing and Urban Affairs during a hearing on “Equipping Financial Regulators with the Tools Necessary to Monitor Systemic Risk.”

Professor Engle shared several key findings from a report that he co-authored for the National Research Council on the regulation of systemic risk:

  • Better data and analytical tools are necessary to measure, monitor and mitigate systemic risk
  • Research in this area is underway but more is needed
  • Additional data across asset classes would be helpful to researchers
  • Standardization and classification of data would be valuable for the industry and regulators
  • Research is needed to develop models that incorporate the four Ls: leverage, linkages, liquidity and losses
He also supported pending legislation to establish the National Institute of Finance (NIF), commenting on strengths and weaknesses of the current proposal. He stressed the following:

  • OTC contracts have the greatest chance of creating systemic risk, so collecting OTC position and transaction data should be a top priority
  • Careful analysis is necessary in the selection of entities to be monitored
  •  Embedding the NIF within a regulatory agency would help ensure the organization’s independence, insulating it from corporate or government pressures
  • The NIF should coordinate with international agencies to collect and analyze data
  • Security of data is key to assuring compliance
  • OTC data should be made public so that firms can better price and manage risk
Read Prof. Engle’s full testimony