The latest financial crisis was marked by a spectacular lack of understanding about the astounding levels of risk that had been allowed to build up throughout the system. Regulators and risk managers realized after the fact that the data they needed to understand the scale, let alone the nuances, of what went wrong just had not been collected, or was obscured or insufficient. With the benefit of hindsight, and as we move into recovery, it is time to think about what role could new statistics play in heading off the next big market crisis. Claudio Borio of the Bank for International Settlements has put together an interesting treatise exploring the priorities we should be setting for new statistics and data sets that may very well help us avoid the next iceberg.
While crises do not occur because we lack the proper statistics, Borio believes that carefully choosing the statistics we need now is an opportunity we should not miss.
Every financial crisis brings in its wake demands for more information; the latest one is no exception. Because, in deceptively tranquil times, it is well-nigh impossible to foster the consensus necessary to improve data availability, such a window of opportunity must not be missed. To be sure, the main reason why crises occur is not lack of statistics but the failure to interpret them correctly and to take remedial action. But better statistics can no doubt be a big help. Priorities for new data collections include better property prices and, above all, comprehensive financial information for banks on a consolidated and global basis, covering their balance sheets but also their income statements. This could be usefully complemented with corresponding information on the international geography of these banks’ operations and, for crisis management purposes, with much more timely and granular data on their bilateral exposures. The collection of information should be based on sound governance arrangements, flexible and cost-efficient. The BIS can play and is playing a very active role.
Borio's paper titled, The Great Financial Crisis: Setting Priorities for New Statistics
, begins with the great paradox of the information age - so much information, but what use is it?
. . . in our internet age, we are constantly bombarded with data, and yet we do not have at our fingertips the information to answer even basic questions about the health of our financial system. Either this information does not exist or, if it does, it is not collected in a way that makes it easily available and digestible.
Proceeding from this paradox, Borio answers three key questions:
- What benefits for financial stability can we realistically expect from better statistics?
There is no holy grail. Better statistics can no doubt be a big help in safeguarding financial stability; improvements are badly needed. That said, the main reason why crises occur is not lack of statistics but the failure to interpret them correctly and to take remedial action.
- What should be the priorities regarding what information to collect and how to collect it?
We should walk before we run. Concerning the “what”, out of the myriad of new statistics that have been put forward, I would highlight two sets, one for prices, of which there is otherwise an abundance, and one for quantities, for which information is much more limited. We urgently need long and internationally comparable series for property prices; and, above all, we urgently need consistent and timely financial information for banks on a consolidated and global basis, covering their balance sheets and, also, income statements – the cornerstone of any more encompassing and sophisticated reporting system. This could be usefully complemented with corresponding information on the international geography of these banks’ operations and, for crisis management purposes, with much more timely and granular data on their bilateral exposures. Concerning the “how”, the collection process should be based on governance arrangements that are sound, flexible and cost-efficient.
- What role does the BIS play in this endeavor?
The BIS can play and is playing a very active role. To do so, it can leverage its comparative strengths: a long track record; the presence of key players (central banks and supervisory authorities); and a specific infrastructure on which to build – the international banking statistics. This has allowed the institution to contribute significantly to post-crisis efforts by the international community to improve the statistics, at least for the banking sector. But while the improvements have been substantial, more needs to be done.
The right statistics will not inoculate the financial system from the next big threat, but at least armed with appropriate data, we may see the next crisis coming well before it emerges from the fog.