When markets plummet, who knows who’s most at risk?

When markets plummet as they did in recent days, regulators need the answer to a crucial question: How many of the world’s banks, hedge funds and other financial institutions might be in danger?

Regulators have had since the 2008 financial crisis to figure out how to gather the information. They’ve done a lot of work – but they still don’t know the answer.

After the troubles of insurance giant AIG and others caught regulators off guard and forced governments to arrange taxpayer-backed bailouts, global leaders set out to build a financial early-warning system. It would mean monitoring the linkages among financial institutions more closely, to identify concentrations of risk in real time and across borders.

Take credit derivatives, the instruments that almost brought down AIG. They provide insurance against defaults on bonds issued by companies and countries, and allow risk to be transferred in an instant – say, from a bank in Taiwan via a dealer in London to a hedge fund in Atlanta. To judge which institutions are most exposed to defaults, regulators need up-to-the-moment data on derivatives outstanding all over the world.

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Over the past several years, national regulators have made progress in collecting this information. The European Union, the U.S., Japan, China and other countries have required that derivatives trades be reported to special repositories. Problem is, they’re using different rules, and data in incompatible formats. And they have no firm plan for sharing the findings.

The result is a mess. The Financial Stability Board, a global regulatory body that monitors the data-collection project, said in a July progress report: “Some authorities have noted that reporting seems to have become more fragmented currently than it was when reporting was solely voluntary. This also makes compliance unnecessarily complex for financial institutions, which must grapple with different and sometimes conflicting requirements across multiple jurisdictions.”

It’s something that regulators at least recognize the problem. The FSB has started a review that will report on barriers to sharing derivatives data at the next summit of the Group of 20 nations, in November. Meanwhile, securities regulators are working to create detailed guidance on how to collect data in a format they can all understand.

That’s fine, but a greater sense of urgency doesn’t seem too much to ask. The status quo plainly isn’t good enough. Maybe the current market turmoil will jolt G-20 leaders into turning up the pressure. No one wants a panic to draw attention to the weaknesses of the system in a much more dramatic way.

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