While so many large financial institutions were teetering during the Great Recession, regulators trying to bring stability to the global financial system quickly learned a startling, shocking fact: there was really no way to net out how much money one financial institution owed to another.
The reason for this is that the complex financial trades that banks were engaged in weren’t straightforward bank-to-bank deals. JP Morgan didn’t just do trades with Citibank, for example. Rather, they were done through a web of subsidiaries, many of them set up specifically to be opaque and obscure. And that’s just the banks. Add in hedge funds and other investors, and their offshore companies and subsidiaries that also were designed to be opaque, and you quickly get to mind-numbing complexity.
With an eye to better regulation and better information during a future financial crisis, an idea was proposed during a 2011 meeting of the G-20 countries to create a numbering system called the Legal Entity Identifier (LEI). The simple idea was that if every legal entity engaged in financial transaction had a unique number, and the record of that legal entity also contained the number for its parent company, it would be easy to roll up these records to see the total financial exposure of any institution.
While you may never have heard of it, the LEI system actually exists, and most financial institutions now have LEI numbers. There is a push in some countries (in the United States, the Treasury Department is leading the charge) to require all companies to obtain a LEI number, it’s been slow going so far.
If this discussion has you wondering about the DUNS number from D&B, not to worry: it’s alive and well. It’s also far more evolved and comprehensive than the LEI system. However, as a privately maintained identifier system, D&B not unreasonably wants to be paid for its use. This rankles some government agencies that are paying substantial sums to D&B for access to the DUNS system, and more than a few are pushing for broad expansion of the LEI system as a replacement for the DUNS system. Suffice to say there is a lot going on behind the scenes.
There are a number of free lookup services for LEI records, and the information is in the public domain. Some data publishers may find immediate uses for LEI data, but its fundamental weakness at this point is that it’s hit and miss as to what companies have registered. Still, it’s a database to know about and watch, particularly if you have an interest in company relationships. Over time, its likely its coverage and importance will grow.