Tags: Berner | OFR | report | Dodd-Frank

Office of Financial Research Reports to House Financial Services Subcommittee

By    |   Friday, 14 Feb 2014 06:51 AM

The House Financial Services Committee's Subcommittee on Oversight and Investigations, chaired by Patrick McHenry, R-N.C., held a hearing Feb. 5 on the first report of the Office of Financial Research (OFR) by its director, Richard Berner.

Although this hearing only lasted an hour and a half, it was very tedious, as members asked and repeated rhetorical questions, and the witness often responded with long-winded answers, sometimes taking time to rephrase an answer he had just given.

As members and the witness repeated over and over, the OFR was created by the Dodd-Frank Act to collect data and use it to identify potential threats to the financial stability of the United States and report its findings to the Financial Stability Oversight Council (FSOC), also created by Dodd-Frank to help inform the Council as it performs its job of identifying systemically important financial institutions (SIFIs) that will be subject to heightened regulation by the Federal Reserve and coordinating the efforts of all of the financial regulators to respond to the threats.

In opening remarks and again later, because repetition is the order of the say at the House Financial Services Committee, McHenry gleefully quoted from two liberal critics of the OFR, MIT Professor Simon Johnson, who called the annual report "not impressive" compared with risk assessments seen prior to 2007, and Dennis Kelleher, CEO of Better Markets, who wrote a comment letter to the Securities and Exchange Commission to attack the OFR for its Report on Asset Management and Financial Stability, arguing that the OFR ignored more pressing issues to investigate the asset management industry.

For good measure, McHenry quoted none other than former committee chairman Barney Frank, D-Mass., who has told the press that it was never the intention of Dodd-Frank that asset managers might be designated as SIFIs.

Berner repeatedly told the subcommittee that the OFR did the report to help the FSOC decide whether to do this.

Republicans heatedly questioned whether the OFR was performing effectively in identifying leading threats to the U.S. financial system. When asked repeatedly to discuss them, Berner gave somewhat inconsistent answers in discussing the following threats listed in the report: 1) disruptions in wholesale funding markets, such as repurchase agreements; 2) exposure to a sudden, unanticipated rise in interest rates; 3) exposure to shocks from greater risk taking in a low-volatility environment; and 4) exposure to a sudden shock to market liquidity. Berner stated that these four tended to be related.

Next were 5) excessive credit risk taking and lax underwriting standards; and 6) operational risks from high-frequency trading. He added that recently a seventh risk has developed in the emerging market currencies (affected by the monetary taper).

Most of the hearing was taken up by Republicans and John Delaney, D-Md., haranguing Berner over the Asset Management Report, raising a list of issues evidently supplied by the industry, such as why the OFR didn't give the industry an opportunity to comment before the report was issued.

Berner must have been surprised when he received friendly fire over a reform called the Legal Entity Identifier that Carolyn Maloney, D-N.Y., strongly objected to as not envisioned by Dodd-Frank. One outcome of the hearing is that Maloney and McHenry resolved to pay the OFR a visit, so that they can take a closer look at what is going on there.

(Archived video, the witness' statement, and the staff memorandum can be found here.)

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Robert-Feinberg
The House Financial Services Committee's Subcommittee on Oversight and Investigations, chaired by Patrick McHenry, R-N.C., held a hearing Feb. 5 on the first report of the Office of Financial Research (OFR) by its director, Richard Berner.
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2014-51-14
Friday, 14 Feb 2014 06:51 AM
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