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Keeping Credit Markets on the RADAR Screen

What might have happened in the recent financial crisis and recession if regulators and researchers had had better and timelier information about mortgage and credit markets? Could the data have helped prevent the spread of contagion from the subprime mortgage market to the broader economy?

While there are no easy answers to those questions, they have prompted the Philadelphia Fed to initiate a System-wide project to create a large and comprehensive warehouse of data on consumer credit markets and provide the ability to analyze the underlying securities that support consumer credit. The objective is to provide tools that can help Federal Reserve analysts identify emerging threats to the financial system. Clearly, the recent recession revealed that researchers need more detailed, better quality, real-time information, particularly on consumer credit behavior and markets.

In 2008, the Federal Reserve Bank of Philadelphia collaborated with the Federal Reserve Bank of Kansas City to create an initial data warehouse with more than 37 million active mortgages going back to 1992. The data warehouse was instrumental in helping the Federal Reserve carry out several key responses to the crisis. For example, the Federal Reserve used the data in designing the Supervisory Capital Assessment Program, commonly known as the stress test, which determined how the nation's largest banking organizations would fare in a severe or protracted economic downturn. The data also helped analysts at the Federal Reserve estimate losses for the government-sponsored enterprises Fannie Mae and Freddie Mac.

The need for an even more comprehensive set of data was evident to Larry Cordell of the Philadelphia Fed's Supervision, Regulation and Credit Department (SRC) while he was working with the initial data warehouse. As Cordell studied the data, he had an idea: expand the information set to include a much broader array of consumer credit data and also gather information on pools of securities that are backed by these same credits.

So Cordell proposed that the Fed acquire additional consumer credit data and then centralize the data into a high-tech data warehouse that could be securely accessed throughout the Federal Reserve System. He also proposed that the Federal Reserve Bank of Philadelphia set up a separate securities evaluation capability to monitor securities markets and to assist examiners in evaluating complex securities at banks to help improve bank supervision. His innovative idea gained Bank-wide support and became a strategic initiative of the Philadelphia Fed. The Bank again partnered with the Kansas City Fed to set up the data warehouse part of the project. Together, these two initiatives were named RADAR, shorthand for Risk Assessment, Data Analysis, and Research, when it was formally launched at mid-year 2010.

“We have added to the original mortgage database, and we now have a set of databases with information on almost 180 million mortgage loans. We also added a database on consumer credit that includes over 40 million individuals, from which personal identifying information has been removed. And all of these data are available System-wide in a state-ofthe-art computing environment,” said Cordell. “In addition, we built a securities evaluation capability that allows us to conduct surveillance across entire classes of securities or perform evaluations of individual securities in bank portfolios.”

Bob Hunt, Larry Cordell, Frank Doto, MaiHoa Le, and Vidya ShenoyThe project involved others in the Bank, as well. Frank Doto, an assistant vice president in SRC, played a key role as project leader, developing a budget, formulating a communications strategy, and obtaining approvals from the Bank's board of directors as well as the Board of Governors in Washington.

Bob Hunt, vice president and director of the Payment Cards Center, set up a System-wide user group as well as a group of data managers whose job is to ensure that the Reserve Banks comply with the terms of the data contracts. He worked with staff from Philadelphia's Information Technology Services Department to make sure that Bank staff could start to work with the data while the larger warehouse was being designed.

In addition, two of the Bank's senior officers contributed oversight to the project. Michael Collins, executive vice president and lending officer, was the project's sponsor, and he and Loretta Mester, executive vice president and director of research, served on the Executive Steering Committee, along with executives from the Board and the Kansas City Fed.

This centralized data resource allows the Fed to evaluate consumer behavior in credit markets, monitor risk-taking more effectively, and better understand consumer credit trends. Cordell noted, “RADAR offers data at a level of detail that was previously unavailable and is not available anywhere else.” Moreover, Doto observed, “Centralizing these data provides huge savings on the costs of contracts and computing environments and allows for better quality control, data governance, and leveraging of technical expertise and knowledge.”

Macroprudential Supervision, Micro-Market Insight

Jeremy Brizzi, Onesime Epouhe, Meredith Williams, Yilin Huang, Robert Dittmar, Michael Hopkins, Saba Tesfaye, and Nicholas ArcidiaconoRADAR enables the Fed to examine data both more deeply and more broadly. It assists in macroprudential supervision, which assesses the risk to the entire financial system rather than to any one individual firm or sector. At the same time, it also helps the Fed develop insights into markets at the micro level, allowing data to be broken down to individual securities or loans in a specific region.

Although still relatively new, RADAR has already had a positive impact on the Federal Reserve's activities. This new data warehouse has not only proven useful in helping users search for specific information, write reports, and analyze research findings, it also informs policy briefings and helps policymakers in addressing specific issues stemming from disruptions in financial markets. In short, it has enhanced the effectiveness and productivity of examiners, economists, and community development staff who use RADAR's two major components, the Data Warehouse and the Securities Evaluation Service (see the sidebar).

RADAR is also helping the Fed address the regulatory challenges it faces in light of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This legislation calls for an improvement in the quantity and quality of financial data. The Federal Reserve views RADAR as a prototype that will extend to collaborative analysis of data for other markets and sectors as well.