India should take lessons in financial research from US
Last week in the US, a massive new Financial Regulation law came into effect. This law is a result is of the 2008 financial crisis that started in the US and eventually engulfed the entire world. The bill’s primary purpose is to improve accountability and stability in the financial system and to end the TBTF (too big to fail) syndrome, writes Dhirendra Kumar.india Updated: Jul 29, 2010 21:34 IST
Last week in the US, a massive new Financial Regulation law came into effect. This law is a result is of the 2008 financial crisis that started in the US and eventually engulfed the entire world. The bill’s primary purpose is to improve accountability and stability in the financial system and to end the TBTF (too big to fail) syndrome.
The bill has been the result of long process of bargaining and lobbying and there are dramatically opposing opinions about whether it will actually be effective; or whether it is surrender to Wall Street lobbyists.
Regardless of what it succeeds or doesn’t succeed in doing, it has some interesting features, one of which is the establishment of an Office of Financial Research. This new organisation’s job is "data collection, applied research and essential long-term research, and developing tools for monitoring risk". The rationale for this new organisation is that one of the root causes of the financial crisis was that the US government did not really know what was happening in the financial sector. The government had data and some statistics, but no actual research that was not driven by some other motives. As someone who is professionally involved in financial research and analysis, I find this idea most interesting. All research is driven by a motive, by the desire to find the answers to a specific set of questions. Financial research is generally driven by the desire to give the user of the research an advantage in terms of generating higher returns than others who are competitors. It’s always focussed on costs and efficiency and ignores everything that is not related to its goals. Academic research, likewise, has its own set of motives and is generally limited by design and resources to answering a narrow set of questions.
What the US Office of Financial Research is intended for is to conduct sustained research on the financial markets with the specific goal of detecting system-wide risks and malpractices. This is something that cannot be done by second-hand research that was originally intended for some other purposes. In India, various government bodies and regulators have their own monitoring with varying degrees of effectiveness. However, the idea of broad-based financial research done with the specific goal of uncovering potential problems is something that is worth examining.