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

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