A Way Forward for OFR: Lessons from Homeland Security

In today’s American Banker, an op-ed appears by this author and a colleague on parallels between the Department of Homeland Security and the Office of Financial Research (OFR).  

As this new agency charged with being the eyes and ears for identifying systemic risk for the Financial Stability Oversight Council (FSOC) begins to ramp up its capabilities, it is imperative that lessons learned from the experiences at DHS not be lost.  In fact, though the areas the OFR and DHS focus on are vastly different, tools and techniques used in detecting threats to homeland security may be quite relevant to OFR’s mission.  In fact, a danger for OFR would be for it to become overly reliant on traditional economic and finance methodologies as they clearly let us down during the financial crisis.  

At OFR’s recent conference on macroprudential analysis and data, there appeared to be interest in moving beyond standard tools, however, the overrepresentation by attendees from the economics and finance disciplines (yours truly included – see paper presented at this conference OFRRiskGovernanceCVR11112011) further underscores the need for OFR to create an interdisciplinary “skunk works” of scientists from both social and physical sciences.  Network, systems reliability and systemic risk analyses are well-established in engineering and other sciences and must be leveraged for analyzing financial market systemic risk issues.  Studies on catastrophic impacts to the US electric power grid from such unlikely sources as geomagnetic storms provide one of many possible research possibilities for future OFR work.  rma-geomagnetic-storms, TFcascadePESGM08  OFR’s work is critically important to the long-term viability of the US financial system and the economy.  Casting as wide a research net as possible for systemic risk measurement ensures the best possible chance at success in implementing valuable metrics and analysis to support OFR’s efforts.