The financial crisis elevated awareness of the critical lack of information available to regulators to assess the risks to institutions and the system in general. Although strides have been made to update and enhance the type of data provided by institutions to regulators, critical deficiencies in data gathering, reporting and measuring key risks persist across the agencies.
In many cases, regulatory agencies fall into the same trap as most of us when it comes to assessing future outcomes. Behavioral finance theorists have for many years given insight into why what has happened to us more recently, good or bad, has a major influence on the decisions we make. In the case of the mortgage crisis, bank regulators have expended enormous resources for good reason in plugging gaps in the way home loan products were originated, financed and serviced. That is a bit like revising the building code to allow for greater spacing between buildings after the Great Chicago Fire. We run the risk of not having tools and capabilities in place to anticipate and hopefully thwart other emerging risks to the system.
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