New York University
Columbia University and ECGI
The Data Standardization Challenge: Forthcoming in Systemic Risk in the Financial Sector : Ten Years After the Great Crash
Data standardization offers significant benefits for industry and regulators alike, suggesting that it should be easy. In practice, however, the process has been difficult and slow moving. Moving from an abstract incentive-based analysis to one focused on institutional detail reveals myriad frictions favoring the status quo despite foregone gains. This paper explores the benefits of and challenges confronting standardization, why it should be a top regulatory priority, and how to overcome some of the obstacles to implementation. The paper also uses data standardization as a lens into the challenges that impede optimal financial regulation. Alongside capture and other common explanations for regulatory failures, this paper suggests that coordination problems, delayed benefits, and other banal, but perhaps no less intractable, challenges are often the real impediments to better financial regulation.
Information is the lifeblood of finance. The role the financial system plays in moving capital from savers to borrowers and projects is inherently informational.
Banks, investment banks, asset managers, insurance companies, and other financial firms add value in part by producing, verifying, and disseminating the information needed to determine who should get financing, on what terms and the risks involved. Financial markets, and the institutional structures like exchanges, play essential roles in aggregating and translating information into price signals.
Institutional investors aggregate capital and further contribute to the informationgenerating role of the financial system. Many significant financial innovations, like securitization, exist not just to redistribute or manage risks, but to do so in a manner that alters the information sensitivity of the financial instruments available in the market to meet participants’ needs. Likewise, other financial-system functions, such as pooling and reallocating risks and providing liquidity depend on the sector’s information-related roles.