Listening to your own advice is risky business. Various Irish Ministers for Finance have learned this the hard way and the country is paying for it. In the aftermath of Ireland’s economic collapse one of the refrains of public discourse was the complaint that successive ministers and their civil servants refused to listen to voices expressing views other than their own. However since the crash and the instatement of Patrick Honohan as Governor of the Central Bank, there has been a significant shift in thinking. Academics are being invited into the process of financial policy making, and encouraged to undertake targeted research around topics such as Irish banking practices.
Prof Gregory Connor, from the Department of Economics, Finance and Accounting is working with a team at the Complex and Adaptive Systems Laboratory in UCD to examine some of the risk elements that led to our collapse and that of other, larger jurisdictions. Critically, (and appropriately in a complex system’s research environment) he is looking at how different markets react to each others’ behaviour.
“I’ve spent my entire career in financial market risk modelling,” says Connor. “Right now, one of the areas I’m looking at is what’s called ‘volatility spillover’; what happens to other markets when there is significant activity in one. In the Euro area, for example, some markets have experienced large daily shifts from opening to closing. I’m analysing how disturbance in the market in Portugal affects Ireland, for example.”
In terms of European capital market integration, which has intensified in the last five years, it’s an important subject for analysis. “European markets are more integrated now. That’s not always a good thing from the point of view of diversification.” The concept that a company, bank or market might be ‘too connected to fail’ is in sharp focus now. A small, rogue bank on the edge of Europe - Anglo Irish Bank - is on eye-wateringly expensive life support because it is too connected to larger institutions to be allowed to die.
Another area of research interest for Connor takes him right to the heart of the troubled Irish banking system as he is working directly with the Central Bank. “With Central Bank researchers Shane Corbett and Maria Woods I am looking at how new financial instruments affect liquidity and volatility or risk,” Connor explains. “Instruments such as Contracts for Difference and Exchange Traded Funds are relatively new and the Central Bank is now placing a priority on examining their impact in terms of banking security here.”
It’s a major shift in thinking at the top levels of Irish administration, says Connor. “Right now the focus is on macro-economics such as recovery and employment. However, at the Central Bank under Patrick Honohan there is the appetite to begin examining how to stop this happening again.” And it’s not just Ireland in the spotlight, says Connor. The entire financial architecture of Europe needs to be analysed and reconceptualised. “The basic restructuring of banks, the capital flows between economies, the flow of information across borders is all very topical now. There are obviously deep flaws in the way the EU’s financial architecture was set up in 1999. The very fact that some institutions became 'too connected to fail' is testament to that.”
By looking at markets and how they interact, Connor hopes that he might be able to throw some light on how the Euro might be ‘redone’. “One thing is sure, the whole system has to be rethought.” Widening the lens further, Connor has looked at the US banking system and what went wrong there. “Leverage ratios in the banks have been creeping up globally. The United States’ ‘great moderation’ was actually global. Legislators and industry were fooled into thinking they could raise leverage without risking a crisis.”
As we slowly rebuild and reimagine ‘doing economics’ in Ireland, it is hoped that the best minds will have a part to play. “Academics are in a great position to help build better warning systems, develop deeper knowledge of capital flows, liquidity problems and recognition of excessive risk,” says Connor. “It’s great for Maynooth to be involved in that.”