The government is aiming technology at measuring risk in financial services, both in monitoring financial firms and its own stimulus programs.
The Securities and Exchange Commission announced yesterday it has created a new division of risk, strategy and financial innovation to “help identify developing risks and trends in the financial markets,” said SEC Chairman Mary L. Schapiro in a statement.
The announcement coincided with recent Congressional calls to use technology to improve financial oversight. In testimony today in a hearing of the House Financial Services Subcommittee on Oversight and Investigations, panelists recommended applying the latest risk assessment and pattern recognition technologies to glean a fuller, and more precise, picture of risks and trends in the financial system. They also encouraged the government to apply tracking technologies to Treasury’s Troubled Asset Relief Program (TARP), to monitor usage and flows of this taxpayer money to banks tapping the fund.
The recommendations highlight efforts targeted at better measuring and more closely monitoring assets for better understanding of systemic risk and interdependencies in the markets, so as to act quicker to stem future economic calamities.
Susan Marlow, CEO of Franklin, Tenn.-based Smart Data Strategies (SDS), is pushing for the use of her firm’s geospatial platforms to collect data on the physical locations of mortgage properties. None of today’s major mortgage databases collect granular location detail, she said, as the raw data is administered ad-hoc on the county level. Such “parcel level data,” which also includes property value, improvements and tax information, can be combined with property records into a single database to which intelligent analysis can be applied.
Consolidating this data on a national level, or in a national database, promises to enable new visualization and heat-mapping technologies that “accurately forecast where foreclosure and delinquency hotspots are likely to occur, thus providing an early warning system” to both regulators and market players, Marlow told the subcommittee. There is a House bill pending to create the database.
“A national parcel system would be a visualization and analytical tool that would allow us to see the geographic location, distribution, and most importantly, spatial relationships of foreclosed properties,” Marlow said. Under the Home Mortgage Disclosure Act, data on mortgage transactions is collected at the census track level, which includes large areas spanning different neighborhoods, versus at the individual parcel level. Individual parcel data has been proven to provide more accurate measures of distribution of households by income level, for instance.
“Any financial system must also have a predictive component,” said Dilip Krishna, director of Teradata Corporation’s North American enterprise risk management practice, in testimony to Congress. “The technology exists today to combine real-time monitoring and ongoing predictive capability within the same system and based on the same detailed data. Statistical analysis and visualization technology can help quickly identify outliers and interpret risk. This analytics technology can allow us to develop an effective oversight regime, keep cost constraints and at the same time allow continued innovation and growth in financial services.” Dayton, Ohio-based Teradata provides risk management and data mining solutions to RBC Financial Group and other capital markets firms.
Two bills – one pending in the House and another in the Senate – would require the collection and funneling of TARP funding data into a single database to track where the money goes. Many say Tarp tracking has been woefully inadequate.
Stephen C. Horne, VP in master data management and integration services at Dow Jones Enterprise Media Group, said his firm has been working with IBM and consulting with SAS on a TARP tracking system that he says would take about 90 to 120 days to, in Rep. Stephen F. Lynch’s (D-Mass.) words “tell where the money went.” Full implementation of a TARP tracking system would cost “under $100 million,” Horne said, with a “first phase” costing “under $50 million” and taking a year to complete.
Various panelists recommended applying the latest in risk assessment and pattern recognition technologies to glean a full yet precise picture of risk in the financial system. The Probity Group promoted its version of gradient analysis, which has its roots in weapons and intelligence risk impact analyses used by NSA and others, to identify risk and resolve vulnerabilities. The system has been adapted by the Probity Group to measure, closely monitor and understand systemic risk and interdependencies in the financial system.
“With this type of analysis in hand, it’s possible not only to quantify and visualize risk consequences but also identify areas of critical vulnerability before something goes wrong,” said Bennet A. Zelner, professor at the Fuqua School of Business at Duke University and vice chairman on the board of The Probity Group. He added that the technology would help regulators better monitor the financial system for pitfalls and appropriately allocate TARP funds to firms whose demise could have systemic consequences.
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