CRE Announces Initiative for Applying Data Quality Law to the Financial Sector
In light of the new Data Quality legislation passed by Congress (discussed in detail on this website), CRE launched a Data Quality Initiative to assist in the efficient and broad implementation of this important provision to ensure the "quality," "objectivity," "utility," and "integrity" of the information used and disseminated by the federal government. CRE believes that the Data Quality statute represents a "Good Government" law, and as such, it should be given wide applicability. While government risk assessment would be subject to the Data Quality law, environmentalists have historically criticized risk assessment legislation for targeting environmental areas. There has been some justification for such criticisms in the past, so for that reason, CRE is emphasizing initial applicability of the Data Quality law to the Financial Sector.
As a prototype case, CRE is focusing its Data Quality Initiative for the Financial Sector on the risk assessment being conducted by the Office of Federal Housing Enterprise Oversight (OFHEO) of the systemic risk posed by Fannie Mae and Freddie Mac to the nation's financial system and to U.S. housing finance markets. CRE has chosen the OFHEO study for Data Quality review because of the broad nature of OFHEO's inquiry and the significant consequences which could flow from inaccurate information in the agency's analyses. CRE has already submitted comments to OFHEO and looks forward to further cooperative efforts to ensure that congressionally-mandated principles for information quality are incorporated in its systemic risk assessment. CRE anticipates broadening the Data Quality Initiative to other agencies in the near future. CRE will keep its readers apprized of the progress OFHEO is making in implementing this new Good Government law.
Requirements of the Data Quality
Congress recently enacted important new
Data Quality legislation as part of the FY 2001 Consolidated
Appropriations Act (P.L. 106-554) which requires OMB to develop
government-wide standards for the information quality in the form of
guidelines which are to be completed not later than September 30,
2001. Congress has provided for broad input in developing the Data
Quality standard, mandating that OMB shall seek "public and Federal
agency involvement." Key elements of the new Data Quality law
OMB must define four key Data
- OMB must also include a
mechanism through which the interested public can petition agencies
to correct information which does not meet the OMB standard.
- Other federal agencies must
issue their own conforming guidelines within one year of the
issuance of the OMB guidelines.
- Agencies are to report
periodically to the Director of OMB regarding the number and nature
of Data Quality complaints received by the agency and how such
complaints were handled.
CRE Data Quality Initiative:
CRE's Data Quality Initiative
CRE believes that the Data Quality
provision represents a significant advancement of Good Government
principles and should be given broad applicability to all government
sectors. Since government information routinely serves as the basis
for regulation and resource allocation, it is imperative that the
information on which the government bases these decision be accurate
and valid. CRE believes that the new Data Quality provisions will
further this goal by promoting transparency, the use of sound science,
and formulation of rational regulatory policy.
CRE is committed to active involvement
in the implementation phase of the Data Quality law. CRE has already
stated its plans to offer its insights and assistance to OMB as it
drafts its generic Data Quality guidance and to the agencies as they
prepare their conforming guidelines. Therefore, as a first step, CRE
is launching a Data Quality Initiative for the Financial Sector.
CRE's Data Quality Initiative will:
Provide CRE consultations with
agency officials regarding the tenets of the new Data Quality law
and interim steps which agencies may take to improve information
quality prior to issuance of OMB's guidelines.
- Review select agency information
products and activities as a quality screen. CRE will make this
information and its analysis open to the public for comment through
postings on its website.
- CRE will then issue a Regulatory
Report Card on Data Quality at the agency and make recommendations
for ways to improve existing processes.
CRE's Data Quality Initiative:
Focus on OFHEO
On October 30, 2000, the Office of
Federal Housing Enterprise Oversight (OFHEO) issued a call for public
comments in the Federal Register on its comprehensive study of
the systemic risks which the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac) may pose to the nation's financial system in general and to
U.S. housing finance markets in particular (65 Fed. Reg.
64718). The study is designed to examine the nature and magnitude of
any risks posed by the enterprises, whether and to what extent the
enterprises contribute to or mitigate systemic risk, what actions
OFHEO or others could do to mitigate systemic risk. The notice sought
public comment by December 29th on research questions which
OFHEO plans to address in the study; however, that deadline was
subsequently extended by the agency until January 29, 2001 (65 Fed.
Reg. 79904, Dec. 20, 2000).
- Click here to review the
questions for which OFHEO sought public comment.
- Click here to review CRE's comments to OFHEO
on systemic risk and the applicability of the Data Quality law.
- Click here to learn how to submit a comment on
systemic risk to OFHEO.
- Click here to submit a comment to CRE's
Interactive Public Docket on this issue.
As a prototype case, CRE is focusing
its Data Quality Initiative on OFHEO's systemic risk study of
Fannie Mae and Freddie Mac. CRE has chosen the OFHEO study for Data
Quality review because of the broad nature of OFHEO's inquiry
and the significant consequences which could flow from inaccurate
information in the agency's analyses. Consultations and analyses
similar to those discussed above will be undertaken.
CRE looks forward to cooperative
efforts with OFHEO to ensure that congressionally-mandated principles
for information quality are incorporated in its systemic risk
assessment, and we anticipate broadening the Data Quality Initiative
to other agencies in the near future.
Questions on Systemic Risk Posed by
Whether and to What Extent Fannie
Mae and Freddie Mac Pose Risks to the Financial System and U.S.
Housing Finance Markets
Do Fannie Mae and Freddie Mac pose
systemic risk, as define below, to the U.S. and international
financial systems? If so, how? How does any systemic risk posed by
the Enterprises compare in magnitude and character, to that posed
by other large financial firms such as large, complex banking
-- OFHEO defines "systemic risk"
as "the possibility that the direct or indirect effects of the
failure of a large financial firm would cause distortions or
disruptions in the financial system significant enough to have a
substantial effect on real output and employment. An event that
caused changes in asset values -- even substantial losses in
values -- would not rise to a systemic threat if it was not
expected to induce a loss in employment or economic output."
Do the activities of Fannie Mae and
Freddie Mac reduce the systemic risk of the U.S. and international
financial systems? If so, how?
Can the risks the Enterprises pose to
the financial system in general and U.S. housing markets in
particular, and any systemic risk they may pose, by quantified
meaningfully? If so, how?
If Fannie Mae or Freddie Mac defaulted,
how severe would losses on that Enterprise's obligations have
to be to render other financial firms undercapitalized or
insolvent? How many firms could experience such solvency problems?
How does the risk of solvency problems vary for different types of
firms, e.g., federally insured depository institutions,
securities firms, major derivatives dealers, other
Government-sponsored enterprises (GSEs), and pension and retirement
funds? How does that risk vary for firms of different size? How
severe might such solvency problems be? How might such problems
affect the functioning of the financial system?
If Fannie Mae or Freddie Mac
experienced severe financial distress or failed, how many other
financial firms could experience liquidity problems? How would such
liquidity problems differ for different types of firms,
e.g., federally insured depository institutions, securities
firms, major derivatives dealers, other GSEs, and pension and
retirement funds? How does that risk vary for firms of different
size? How severe might such liquidity problems be? How might such
problems affect the functioning of the financial system?
If Fannie Mae or Freddie Mac failed or
significantly curtailed its activities, how would liquidity in U.S.
mortgage markets be affected? Would the other Enterprise or the
rest of the industry be able to effectively fill the void? What
would be the likely effects on the supply and price of mortgage
credit? What would be the likely effects on economic activity in
the housing sector? How might prospective homebuyers be
What is the risk that solvency or
liquidity problems at financial firms caused by severe financial
distress at or default by either Enterprise could be serious enough
to reduce employment or economic output or hamper the achievement
of the goals of federal housing policy?
Fannie Mae and Freddie Mac are major
participants in national and international systems for clearing and
settling financial transactions. What risks do the Enterprises pose
to such systems?
The outstanding debt of Fannie Mae and
Freddie Mac has grown at an annual average rate of nearly 24
percent since year-end 1992. If debt issued by the Enterprises
continued to grow substantially faster than most other types of
credit market instruments, how would any risks Fannie Mae and
Freddie Mac pose to the financial system as a whole, and U.S.
housing finance markets in particular, be affected? How would those
risks be affected if debt issued by the Enterprises and other GSEs
replaced Treasury securities as a benchmark in financial
How independent are the risks posed by
Fannie Mae and Freddie Mac?
The Effect of Federal Sponsorship
and Regulation on the Risks Posed by the Enterprises
What are the implications for the risks
Fannie Mae and Freddie Mac pose to the financial system in general
and U.S. housing finance markets in particular of the fact that
investors in the Enterprises' obligations believe the federal
government would act to protect them in the event either Enterprise
Is there uncertainty about the actions
the federal government would take in the event either Enterprise
experienced severe financial distress? Does any such uncertainty
affect the risks posed by Fannie Mae or Freddie Mac?
How does current federal regulation of
Fannie Mae and Freddie Mac affect any systemic risk posed by the
Actions to Reduce Risks Posed by
Fannie Mae and Freddie Mac
What steps could be taken to reduce the
risk that a default by Fannie Mae or Freddie Mac would cause other
financial firms to experience solvency or liquidity problems? What
are the potential costs and benefits of those options?
What steps could be taken to reduce the
risk of the Enterprises developing liquidity problems if either of
them experienced severe financial distress? What are the potential
costs and benefits of those options?
In addition to OFHEO's capital
regulation and examinations of Fannie Mae and Freddie Mac, what
steps can OFHEO or other appropriate entities take to reduce any
risks the Enterprises may pose to clearing and settlement systems?
What are the potential costs and benefits of those options?
In what areas could increased
transparency and public disclosure by Fannie Mae and Freddie Mac
reduce the risks they pose to the financial system in general and
U.S. housing finance markets in particular? What specific
information would be most valuable to market participants?
Could increased market discipline of
Fannie Mae and Freddie Mac reduce the risks they pose to the
financial system in general and U.S. housing finance markets in
particular? If so, how? What specific actions could be taken to
increase market discipline of the Enterprises? Could increased
market discipline increase the risks Fannie Mae and Freddie Mac
Should OFHEO's approach to
regulating the Enterprises be adapted to reflect the risks Fannie
Mae and Freddie Mac pose to the financial system in general and
U.S. housing finance markets in particular? If so, how?
Should OFHEO's statutory
authority be adapted to reflect the risk Fannie Mae and Freddie Mac
pose to the financial system in general and U.S. housing finance
markets in particular? If so, how?
December 21, 2000
Mr. Robert S. Seiler, Jr.
Manager of Policy Analysis
Office of Federal Housing Enterprise Oversight
1700 G Street, N.W., Fourth Floor
Washington, D.C. 20552
Dear Mr. Seiler:
I am writing in response to the Office
of Federal Housing Enterprise Oversight's (OFHEO) call for
public comments in the Federal Register on the issue of the
potential systemic risk posed by Fannie Mae and Freddie Mac to the
nation's financial system and to the U.S. housing finance market
(65 Fed. Reg. 64718, October 30, 2000). As an organization with
considerable expertise in the area of risk assessment, the Center for
Regulatory Effectiveness (CRE) is pleased to offer the agency its
comments and recommendations on this significant area of
About the CRE
The Center for Regulatory Effectiveness
was established in 1996, after passage of the Congressional Review
Act, to provide Congress with independent analyses of agency
regulations. From this initial organizing concept, CRE has grown into
a nationally recognized clearinghouse for recommendations and
activities to improve the federal regulatory process.
CRE has no members, but it receives,
from time to time, financial support, services in kind, and work
product from trade associations and private companies. Thus, CRE is
able to draw upon the views of hundreds of firms. In addition, the CRE
Advisory Board consists of former career officials from the Office of
Management and Budget's (OMB) Office of Information and
Regulatory, each of whom brings their own perspective to the
Another unique feature of the CRE is
its website ( which is designed to promote sound public policy and
regulation by facilitating interaction between government, industry,
organized groups, and the interested public. The CRE website
encourages dialogue by reporting on various regulations or issues with
the potential for regulatory action. CRE also identifies opportunities
for public comments on these issues and has introduced the concept of
an "Interactive Public Docket," which allows for ongoing debate of
proposed regulations even beyond the close of formal agency public
comment periods. I invite you to visit our website as a way to better
understand our organization and the types of issues in which we are
CRE Comments on OFHEO's
Systemic Risk Inquiry
As noted above, the Center for
Regulatory Effectiveness has been very active in the field of risk
assessment, albeit in the environmental area, as is demonstrated on
our website. The field of environmental risk assessment has been
evolving for decades to reach its current state of reliability for
regulatory purposes, and while CRE applauds the expansion of risk
assessment to other disciplines, such steps must be taken deliberately
and with great care.
Therefore, in undertaking its review
of systemic risk, CRE believes OFHEO should:
Post all comments it receives on the
systemic risk issue on its website, so that interested parties
can see and respond to the views and concerns expressed by their
In order to reach the broadest
possible audience on this important issue, OFHEO should
summarize and address comment received during this initial
public comment period and then publish this analysis in the
Federal Register for a second 60-day comment
-- In light of the
agency's own statement that "... OFHEO has
consistently classified the Enterprises as adequately
capitalized ... financially sound and well managed," time
is clearly not of the essence, and the agency would
benefit from a thorough airing of all facets of this
important matter. (65 Fed. Reg. 64718,
OFHEO should consult with other
federal agencies -- particularly agencies with regulatory
responsibilities for financial markets -- to determine
whether they have conducted assessments of systemic risk in
their own areas of regulatory responsibility. Where such prior
experience does exist, OFHEO staff should draw upon such
expertise to the extent possible.
In conducting its inquiry, OFHEO
will need to define certain key terms and concepts.
-- OFHEO should define up
front what will be an allowable level of risk to the
system. This will provide the agency with an objective
standard for comparison before delving into the
intricacies of the enterprises' operations and
-- OFHEO should also
define a working definition of the threshold of systemic
risk which will necessitate action by OFHEO and/or the
CRE agrees with OFHEO that Fannie Mae
and Freddie Mac have performed exceptionally well in the past, and
while OFHEO's inquiry is valid and in keeping with its
regulatory responsibilities, there is no basis for the enterprises to
be seen as suspect. The enterprises might be encouraged to consider
additional efforts at transparency, as such efforts by any
organization routinely benefit interested parties and the public.
However, particularly in operations which are apparently working well,
it is imperative that the agency gather a significant amount of
information with ample opportunities for public comment prior to
taking any regulatory action. Otherwise, the very financial system and
housing finance markets which OFHEO seeks to protect could be
Lastly, we would note that analyses
generated by OFHEO will have to comply with the "Data Quality"
provisions of the recently enacted FY 2001 Consolidated Appropriations
Act. Please feel free to contact us or our website if you need
additional information on this new statutory provision.
Jim J. Tozzi
Member, CRE Board of Advisors
How to Submit Comments on Systemic Risk
Written comments on the systemic risk
issue may be submitted to OFHEO by January 29, 2001 to:
Mr. Robert S. Seiler, Jr.
Manager of Policy Analysis
Office of Federal Housing Enterprise Oversight
1700 G Street, N.W., Fourth Floor
Washington D.C. 20552
Electronic comments may be submitted by