2016 brainfood avertingnextcrisis 883x432 1

Averting the next crisis: why some banks are taking a revolutionary approach to training

28 January 2016

The article at a glance

Sir Paul Tucker, chairman of the Systemic Risk Council and former deputy governor of the Bank of England, thinks central bankers will …

Sir Paul Tucker, chairman of the Systemic Risk Council and former deputy governor of the Bank of England, thinks central bankers will need to be experts in both financial economic and macroeconomics to protect the global economy from a future crisis.

2016-brainfood-avertingnextcrisis-883x432

Central banks are staffed mainly by economists but need a wide range of knowledge too, according to Sir Paul Tucker, former deputy governor of the Bank of England. “As well as macroeconomics and international affairs, finance is a key building block for today’s central bankers, who need a good grasp of finance theory, markets, financial institutions and financial infrastructures,” says Tucker, who is now a fellow at the Harvard Kennedy School, chair of the transatlantic Systemic Risk Council and an Advisory Board member at Cambridge Judge Business School. “A broadening in the education of people working in central banks is underway and that must be sustained.”

Even if it were some years before individuals with a strong understanding of finance and modern finance theory reach positions of strategic importance within central banks, Tucker believes that those who do rise to senior levels could make a significant difference to the strength and stability of the global economy and international financial system.

Central banks are hugely important to the global economy and to the global financial system, as guarantors of price stability and, in an increasing number of cases, as national financial sector regulators. It seems strange to suggest that financial knowledge inside these institutions might be limited, but Dr Simon Taylor, Director of the Master of Finance (MFin) programme at Cambridge Judge Business School (CJBS), agrees that this does often seem to be the case.

“Economists and finance people are not quite the same,” Taylor notes. “Economics is generally studied in university departments; finance is studied in business schools. There’s a surprising lack of interaction between them. For many years central banks didn’t see any need to recruit people from a finance background. They recruited very smart people with PhDs and masters degrees in economics. And all appeared to be well for a long time, so that policy was self-reinforcing.”

Taylor contends that this was part of the reason the 2007/2008 financial crisis caught central banks by surprise: it was caused by vulnerabilities in the financial system of which the central bankers were largely unaware. Those vulnerabilities then had consequences within the financial system that macroeconomics could not have predicted.

It is hoped that a new Central Bank Scholarship for MFin students at CJBS will help to address this knowledge gap within central banks. Scholarships are only available to applicants who work at national central banks, or other “official sector” organisations (such as the IMF or the World Bank), who will return to their employers after completing the course.

Prior to the launch of the scholarship some central banks were already sending staff to study for the MFin, but CJBS is particularly keen to encourage applications from individuals working for central banks within emerging economies, which would have been less likely to send students before the scholarship was established. The first cohort of scholarship recipients arrived in Cambridge in late summer 2015 and will complete the course in the autumn of 2016.

Scholarship student Eggert Thorainsson has worked for the Central Bank of Iceland for five years. He says he applied to join the MFin programme because although he had some experience of working in a financial company, he felt that if he were to advance much further within the central bank he would be able to do a better job if he had completed a more specialised study of finance.

“In recent years central banks have become larger parts of the global financial system, both when trying to maintain financial stability and to set macroprudential rules,” Thorainsson says. “At the same time, some central banks are active in the securities market and others are building up foreign currency reserves.

“So central banks now need people with a solid theoretical understanding of finance, combined with a traditional education in economics. Education like the MFin at CJBS can help central banks fill in that knowledge gap.” Thorainsson also hopes to form professional relationships with fellow students who may end up being his counterparts within other central banks at some point in the future, making it possible for them to share and learn from some of their experiences and to advise each other on tackling similar issues.

His fellow student Evelyn Navarro-Navarro has worked for the Central Bank of Costa Rica for five years and has a masters degree in economics from the University of Costa Rica. She applied to the programme and the scholarship through the bank’s training programme.

“A better understanding of the world will help anyone working in a central bank,” she says. “Central bankers have to know not just about economics but about financial institutions and markets – an understanding of the links between economics and finance. When I return home I think that’s the most important contribution I can make: to help the bank understand the consequences of its policies.”

It could take a generation for the effects of those changes to be felt within central banks, admits Tucker. But it is vital attempts are made to do, he says, to address “a gap that has caused enormous problems in the past”. If he is correct, efforts beginning today to close that gap could deliver lasting benefits to societies across the world for decades to come.