The Office of Financial Research (OFR) was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Charged with providing data, analysis, and research regarding systemic financial risks to the members of the Financial Stability Oversight Council (FSOC), OFR is an integral part of the federal infrastructure for safeguarding financial stability. OFR, while not itself a regulatory body, investigates systemic risks, standardizes the data used across government, and can offer financial regulators a more robust empirical base from which to devise regulations. OFR was designed to address the proven inability of financial regulators in the lead up to the Great Recession to understand dangers before threats turned into devastation.
As such, in a time of great economic upheaval, OFR’s research is essential to preemptively protecting the public from systemic risks that lurk throughout the financial system. From researching the risks that climate change poses to the financial system to the lingering financial consequences of the pandemic, OFR’s work will be integral to competent, informed, and coordinated federal financial regulation moving forward. However, since its inception the agency has faced attack by the financial industry and its Republican allies. This has led to the steady loss of resources and staff, making the office less productive and less effective. This has grave consequences for the readiness of FSOC member agencies to address new and lasting threats to our collective financial security. To stabilize our collective financial future, the Biden administration must fully invest in the OFR through terminating bad actors within the office, fully resourcing the agency, and institutionalizing the office’s independence.
The Office of Financial Research is intended to function as a data-driven institution that can enable FSOC member agencies to preemptively regulate against the next financial crash. It was also designed to be independent and to provide a cross-agency depository of research, market monitoring, and analysis so as to inform the rulemakings of federal financial regulators. As such, it investigates far-flung corners of finance and looks for sites of potential precarity within our economy. With its broad authorities and intentional independence, lawmakers imagined it to be the frontline of defense against a new financial crisis.
Unsurprisingly, this role has earned the agency many enemies on Wall Street and amongst its political allies. Republicans have continually offered the misleading lie that the office is wholly unnecessary, and that it offers a mere replication of information already available in other sectors of the FSOC member agencies. Alongside industry figures, they have also challenged the office’s output that they don’t like. In 2013, for example, OFR put out a study which effectively concluded that the multi-trillion dollar asset manager industry posed a significant threat to the country’s financial stability. Industry and its allies on Capitol Hill met the report with rage, arguing that OFR essentially fabricated the report to justify “unfair” regulatory interest in the industry. They went further as well to effectively demonize the office as a wasteful, unnecessary, and repetitious institution that is not necessary for the financial health of the nation. In reality, it seems more likely that Republicans were dissatisfied that OFR’s investigation of emerging sectors of the financial industry was potentially onerous for Wall Street execs engaging in predatory, risky, and dangerous financial practices that had previously escaped regulators’ notice.
The agency is so reviled in conservative circles that in 2016 congressional Republicans introduced legislation, known as the CHOICE Act, that would have abolished the office altogether. In 2021, Sen. Ted Cruz re-introduced similar legislation. The 2016 effort did not pass, nor is the latest version likely to, but the never-ending attacks have destabilized the office’s foundations and made the institution easier to undermine. The past several years have witnessed the fruits of these attacks, borne in a decimation of the agency’s resources and weakened capacity to fulfill its mandate.
The Trump Administration
While the attacks levied against the office predate Trump’s presidency, they did worsen significantly under his administration. First, the Trump administration sought to rein in OFR’s authority by undermining its independence and having FSOC and Treasury leadership set the office’s priorities. A lack of independence critically harms the agency’s effectiveness and “makes it less likely that it will quickly identify and thoroughly investigate financial system vulnerabilities, data gaps and holes in the regulatory architecture.” Then, in 2019, Donald Trump’s pick to head the office, Dino Falaschetti, began dismantling the agency from its helm. Not unlike Ben Carson’s tenure at the Department of Housing and Urban Development, Falaschetti oversaw broad staffing and budget cuts that decimated the institution’s productivity, and which continues to hinder the financial system’s readiness to anticipate potential financial shocks.
In line with Donald Trump’s deregulatory agenda, and Executive Order 13771, the Trump administration slashed the office’s budget under the guise of saving taxpayer money. The office’s 2017 budget of $101 million fell over 17% in 2018, to just $83 million. From 2018 to 2019, that dropped more than 9% to just $75 million, where it has remained roughly stagnant ever since. To clarify, from 2017 to 2021, the office’s budget dropped a total of 25% even before accounting for inflation or the growth in complexity of financial systems, including the ascent of cryptocurrency. While the Trump administration claimed these cuts were completed in the interest of saving taxpayer money, they didn’t actually save any public funds. OFR’s budget comes from its fee authority over the country’s largest banks and other financial institutions, meaning that the cuts served only the interest of finance giants while leaving the public increasingly vulnerable to unexpected disruptions.
Some departments within the OFR fared better than did others amidst these cuts. The Data Center, which “collects, validates, and maintains all data necessary to carry out the Center’s duties,” sustained the worst losses from 2017 to 2021 at 81% of its funding. Equally concerning for the office’s ability to fulfill its mandate, are the losses at the OFR’s Research and Analysis Center. The research center is the investigative backbone of the OFR, responsible for researching, analyzing, and publishing the office’s findings on highly technical financial policies and standing risks to the financial system. From 2017 to 2021 the research center lost nearly 25% of its funding.
Notably, the OFR’s fee schedule is determined by the director in consultation with the chair of the FSOC, and Falaschetti has continually chosen to maintain this devastating, and highly limiting, budget structure. Of course, this isn’t entirely surprising considering that Falaschetti also advocated for the total shuttering of the agency while he was the chief economist for the House Financial Services Committee.
The budget cuts translated to the office’s staffing, which remains massively deflated following huge losses during 2017. At the end of 2016, OFR staffed 214 full-time equivalents (FTEs). By the end of 2021, the office was left with only 128 FTEs, representing a whopping 40% decrease in its staff capacity. As intended, staff shortages and budget cuts at the office effectively decimated its output. In 2016, the OFR put out a total of 26 publications, including seven briefs, four reports, 14 working papers, and one viewpoint paper. In 2018, the office only put out ten publications (representing a 61% productivity decrease), composed of one report, six working papers, and one staff discussion paper. 2021 saw the office publish a mere seven publications throughout the year, or a 73% decrease from 2016 levels, composed of just three briefs, one report, and three working papers. Missing entirely from the office’s output since 2017 has been its financial stability report, a publication that previously provided “rich analysis into emerging threats such as the potential role of ETFs in generating and propagating liquidity stress to […] the vulnerability of the financial system to malicious cyber threats.”
The loss of these publications, and the steadily decreasing level of the OFR’s output, paints a precarious picture regarding our collective preparedness to foresee, stop, and weather another financial crisis akin to that of 2008. Of course, there is already another financial crisis looming that is under researched and about which regulators are incredibly underinformed: climate change.
As the Revolving Door Project has highlighted previously, climate change poses an existential threat to the financial stability of the nation. The Center for American Progress has also examined how climate change rises to the level of a systemic threat to our collective financial security because of the sheer breadth of financial firms who cannot withstand the inevitable financial shocks that will reverberate from a changing climate. The OFR, as an analytical body, is a critical piece of the financial regulatory framework for coordinating and motivating a legitimate federal response to this, and similar, systemic threats. While the OFR is a part of the regulatory framework, it is not itself a regulator, which allows the agency to operate from a more empirical viewpoint, and to speak in more explicit terms, separate and apart from the interference and interest of industry. It offers a doorway through which financial regulatory firms can investigate, and to begin the informed regulation of, climate change, its causes, and its consequences.
This unique position grants the office the opportunity to frame, empirically back, and present to FSOC member agencies the aggressive financial measures necessary to tangibly reform the existing financial system. While OFR cannot independently forge the regulations necessary to implement this climate-conscious financial future, the data and accompanying analysis of the realities of climate change and its impact on the financial system could jumpstart federal action across the regulatory bodies themselves through its legitimation of the issue at the highest levels of government.
A Path Forward
To be a partner in the regulatory redress of climate change, it is critical that the OFR re-commit itself to its founding purpose, and utilize all of the many tools at its disposal to fully empower federal regulators to protect the public.
First, the Biden administration must fully restore the staff and budget capacity of the office. To start, that must mean removing Director Falaschetti who has proven himself continually unwilling to work in OFR’s (and the public’s) best interest. The OFR Director has broad authority to set the fee schedule, and therefore the budget and staffing priorities of the office, making the position integral to any reformation of OFR’s decline. Falaschetti’s tenure at the OFR has witnessed the decimation of the agency’s productivity, staff infrastructure, and budget. His advocacy for the complete collapse of the institution, and his lasting hostility towards its mission, leaves him unfit to continue to helm the agency. Biden must remove him from the office and instead appoint a climate champion to rebuild the office in general, reaffirm the sanctity of the office’s mandate, and to spearhead the founding and implementation of new climate-centric initiatives.
New and necessary climate initiatives must also include the formation – and full resourcing – of a new climate-specific department for the express purpose of investigating the climate crisis, its financial consequences, and the necessary tools to reform the system now and in the future. The climate crisis necessitates a whole-of-government approach to begin tackling the expansive consequences it offers. OFR, as a purely analytical entity, has the responsibility to craft the empirical grounding to shape and sustain this cross-government approach. The threat climate change poses to our collective security is a lethal one, and the OFR must commit equivalent resources to its investigative priorities as the danger the climate crisis represents.
The office must use all of the tools at its disposal to implement this critical work. In particular, OFR should finally exercise its broad subpoena authority, and discern the best use for this powerful tool in the fight towards responsible regulation. Private sector data is critical to any informed understanding of the financial state of the nation, and the OFR’s subpoena authority over financial firms can offer regulators a more robust picture of where climate risk is currently entrenched in the private sector. This data will allow them to not only make stronger, empirically based recommendations, but also increase the odds that regulations based on rich data stand up to judicial scrutiny. The office has historically been reluctant to use its subpoena authority, anticipating significant private sector blowback, but the financial sector has proven itself unwilling to hold itself accountable. As such, it is not only the right of the OFR to exercise its subpoena as outlined in Dodd-Frank, but also its responsibility.
Additionally, the Biden administration must reaffirm, and reinstitutionalize, OFR’s independence from Treasury and the rest of FSOC. While it is integral that the OFR be an active part of the coordination between these agencies, its agenda must not be beholden to the inherently limiting scope through which these agencies operate. The OFR is intrinsically forward looking as a precautionary research body whereas regulators frequently place more emphasis on the current financial state of the nation. Both perspectives are important, but given the extreme consequences that climate change poses to the not-too-distant future, data and regulation cannot be postponed to when the worst of its consequences have already come to fruition. The OFR, when truly independent, offers financial regulators the opportunity to fully discuss these consequences, and to do the work to prevent their occurrence instead of seeking to mitigate the devastation once it has already arrived.
OFR has the potential to be a critical partner in the federal coordination of climate-related regulation and mitigation efforts. In order to fully empower federal regulators, though, OFR itself needs to be empowered and resourced.