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Case study:
Saving banks – from themselves

Saving banks – from themselves

Professor Pierre-Richard Agénor is in the business of saving banks from themselves.

In the wake of the world financial crisis, his cutting-edge research is redefining the agenda on financial regulation and helping central banks lead the way in promoting economic stability.

Professor Pierre-Richard Agénor
Professor Pierre-Richard Agénor

As Manchester’s Hallsworth Professor of International Macroeconomics and Development Economics, his academic credentials are impeccable.

But the complex theoretical models he and his collaborators have developed are no abstract ‘ivory tower’ vision. They are having a significant impact not only on academic research but also in the real world.

Indeed, the path-breaking work, focusing on middle-income countries like Brazil and Turkey, has received immediate worldwide attention and begun to influence high-level debate in major international institutions.

“Since the global financial crisis central banks have had to completely rethink what they do,” said Professor Agénor.  “Until then financial regulation was very much focused on individual institutions.

“It became increasingly clear that central banks needed to take a macroprudential approach – focusing more on risks to the financial system as a whole. If you allow banks to concentrate on their own business they tend to amplify cyclical fluctuations.

“When they are doing well and times are good, they are too optimistic and lend too much. When there’s a downturn they get spooked and cut lending too far; put the brakes on, as it were. The effect of all that is to exacerbate changes in the economy.

“My work has focused on building theoretical models to understand how policies work in terms of identifying weaknesses in the system and promoting financial stability.  Should policies be combined? Could monetary policy do more? Should central banks be more concerned with the bigger picture?

“The conclusion we reached was very much yes.”

The findings led to proposing a new monetary policy regime for middle-income countries in which the central bank is explicitly responsible for financial stability – helping prevent crises like bank runs – and monetary and macroprudential policies are set jointly.

They also have implications for other nations. Professor Agénor has already been awarded funding by the Economic and Social Research Council to lead a major research project on financial regulation in low-income countries.

"Should policies be combined? Could monetary policy do more? Should central banks be more concerned with the bigger picture? The conclusion we reached was very much yes."

Professor Pierre-Richard Agénor / Hallsworth Professor of International Macroeconomics and Development Economics

While his areas of research are unusually wide – gender equality, international finance, poverty reduction, growth theory and labour markets – he’s very clear that it’s how they affect policy that ultimately counts.

“Policymakers want to know what my models will tell them – not how many equations they have,” he says. “It’s important to speak their language. You have to live in the real world.” 

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