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Crisis drives academics and banks to work together

Academics attending an international conference on how their work can promote financial stability have stressed how universities can play an important role in helping the world recover from the recession.

Indeed Dr Jean-Pierre Zigrand, reader in finance at the London School of Economics (LSE), told University World News at the Brussels event that there was a new, unusual drive for academics to work together with economists and central banks in the aftermath of the global financial and economic crisis:

“That’s because they [central banks] don’t have the required tools and only universities have the 'manpower', the human skills and the capital to come up with [these models], Zigrand said.

He was speaking at an event organised by the Joint Research Centre (JRC) of the European Commission in Brussels this month to investigate the ways science can contribute to financial stability. It involved high-ranking financial experts, scientists, academics, heads of industry associations and policy-makers.

The meeting’s aim was to evaluate the main sources of risk and vulnerability in financial stability and facilitate debate and targeted, evidence-based structural reforms, said a JRC note.

Zigrand argued that central banks needed to rely on models provided by academics in finding and exploring solutions to the current crises ravaging Europe. “Universities are more needed now,” he stated.

“There is a certain pressure on the banks and final users to come up with research that shows that things are not as bad as people perceive them to be,” he explained, stressing he was not voicing an official LSE view.

And while he acknowledged that there was collaboration between universities and central banks before the crisis, Zigrand said that the nature of the questions academics are asked has changed.

While in the past central banks would have asked universities about different financial mechanisms in generating more profit, the questions now are slightly more about capital safety and perception management, since there are many people who do not trust the markets.

Leen Hordijk, professor emeritus of environmental systems analysis at Wageningen University in The Netherlands and JRC modelling taskforce chief, is also convinced that universities have an important role to play in responding to the crisis.

He believes one crucial task the economics departments of universities can do is to analyse the data gathered about the effects of the crisis.

“We now have a few years of data that indicates what happened after the crisis and the challenge is to collect that data and interpret it,” Hordijk told University World News.

Coming up with more comparable research about what happened during the crisis in the European Union and in the US, and creating indicators, would be a good result of that process, said Hordijk.

“It’s not the most advanced type of research, but that’s where we have so much data now. There are data mining techniques [that universities can use] in order to analyse what we can learn.”

A neutral role

One advantage that universities have over more specialised research centres when studying the crisis and possible solutions is neutrality, according to Zigrand. “We have a unique role of untainted, evidence-based, unbiased research that is very hard to replicate in other entities.

“Universities are built to precisely guarantee that you can actually say what you think and not have to think about any negative consequences”, he added.

The crisis and its consequences have certainly helped develop new research, according to Professor Oliver Linton, chair of political economy at Cambridge University.

Speaking to University World News, Linton said the crisis showed that economic models developed by academics prior to the recession needed to be reassessed.

“There’s been a lot of criticism about the model that has been developed by academics and taken by students into banks and used,” he said, noting that academics should have some humility over this issue. He also stressed that this was not an official Cambridge position.

But while research undertaken in universities has been useful in interpreting ongoing economic problems, it cannot itself provide solutions to the crisis, said Carlo d’Adda, professor emeritus at the University of Bologna.

“Finding solutions is not simply a technical problem,” d’Adda told University World News, adding that the current financial crisis is so complex socially and politically, solutions cannot be devised in universities alone.

But he thinks higher education institutions can contribute in responding to the crisis by better preparing their students. “Fifteen years ago, our graduates didn’t know as much finance as they know today,” said d’Adda.

A new teaching paradigm

Linton and Zigrand agree that the teaching paradigm has been changed by the crisis.

“The way we teach things now is not the way we taught things in the past. It has not only changed because of the crisis. We are trying to influence policies more than we used to,” Zigrand explained.

Classes related to risks in markets and financial crisis have long been taught, but students now pay more attention than before, according to Zigrand. “You used to have five students and now there are 50 students,” he explained.

The job expectations of students in economics and finances have also changed, Zigrand argued. “Students [in the UK] don’t expect to go to banks and do derivatives; they now expect to go to the FSA [Financial Services Authority]," he said. The FSA regulates all providers of financial services in Britain.

Where universities have a big role to play in contributing to financial stability is in being able to predict future crises, Leen Hordijk believes: “The challenge for universities is not finding the elephant in the room, but seeing the elephant coming before it hits the door.”

* At the event in Brussels, the JRC and the College of Europe, in Bruges, signed a memorandum of understanding to work together on the improvement of analysis and tools for diagnosis and forecast of economic situations and the impact of macroeconomic policy decisions.

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