Why MFin students are a good fit with central banks

Central banks, which are the most important financial institutions in most countries, have typically employed lots of economcs graduates in the past. They might benefit from adding a few finance graduates in future.

Central banks have responsibility for controlling inflation and influencing the wider economy. In some nations they also have responsibility for regulating the financial system, though that role is often shared with other authorities. These are very important duties. A central bank needs people who understand the macroeconomy, the financial system and the complex interplay between finance and what economists call the “real economy”. Real here is not to be contrasted with imaginary or virtual. It means the actual goods and services that people consume and use and the employment of people. Financial matters are importantly ultimately only in so far as they help the real economy.

For decades central banks have employed economics graduates. The ideal candidate, usually with a masters or PhD, would specialise in monetary economics, macroeconomics or perhaps international economics, since international trade and payments are important for central bank policy. To non-specialists these categories might not seem very different from finance but in practice central banks have not employed many people who specialised in understanding the financial system. This is partly because monetary economics and finance are quite distinct subjects.

Monetary economics concerns the role of only one financial asset, albeit the most important one, money. The role of money in the economy has been central to economics for over two hundred years. But monetary economics usually treats the rest of the financial system as relatively simple or uninteresting. Those who study financial assets and the role of financial markets typically don’t work in economics departments but in business schools, reflecting the almost tribal separation of the economics profession. Finance is a large industry that employs lots of business school students, or at least it used to. That is one reason why finance teachers have higher potential value and they are paid more, on average, than economists who work in mainstream university economics departments. That has led to some unhealthy intellectual separation.

But it didn’t seem to matter before 2007. The long period of what was called the “great moderation”,when inflation fell back from its high levels of the 1970s, made it look as if the problem of monetary policy – how to control inflation without damaging the real economy – had been solved. Macroeconomists had no interest in the complex details of financial intermediation, which might be of interest to students looking for investment banking jobs but didn’t matter for policy.

In 2007-08 economists in central banks had an unpleasant shock when they came to realise that the financial system was central to the cause and the amplification of the financial crisis. The underlying causes were excessive leverage and a real estate bubble, driven by financial innovation (securitised mortgages and collateralised debt vehicles – both of these involved packaging loans made by banks into complex securities sold to investors who often didn’t understand what they had bought). The shock from a fall in housing prices was then increased far beyond the actual fall in real estate values by the fragility of the “shadow banking” system, which reproduced the asset-liability mismatches of conventional banks but with no regulation or back up from the central bank. This turned an asset price fall into a crisis of confidence in the banks, which was only fixed by emergency action by central banks.

While central banks for the most part did a good job in fixing the crisis once it happened, they stand accused of not noticing the build up of risky chains of institutions and products that made the system far more fragile and unstable. And that is partly because there were too few people in the central banks looking at the financial system.

I have visited several central banks in the last few years. There is a new interest in recruiting students with a finance background, rather than conventional monetary or macroeconomics. Central banks realise that the great complexity and continued evolution of the financial services industry makes it important to have employees who “speak” finance and understand the industry. Macroeconomics is undergoing something of a catch-up process to take finance seriously in its models (previously finance was largely ignored). That’s a good thing but the institutional separation of macro and finance economists is likely to continue to be a barrier to better intellectual convergence.

Meanwhile the MFin has been seeing a steady flow of students into central banks and other official sector (*) organisations such as the IMF, World Bank, IFC and so on. I expect that to continue and to grow. It’s a very constructive way for students to use their MFin knowledge and previous work experience. MFin graduates currently work in the central banks of: the UK, China, Japan, Malaysia, South Korea, Saudi Arabia and Cyprus. In addition there are MFins in the IMF, World Bank, IFC, African Development Bank, China Development Bank and various regulatory agencies.

In recognition of this growing role for MFin graduates, we are launching a new central bank and official sector scholarship programme. Central banks employ some of the smartest people around in fascinating and important jobs, but they often don’t pay quite as well as the private sector. So we’re offering a scholarship for any suitably qualified applicants from central banks, who would need to return to their employers to qualify for the scholarship. We hope that central banks will match our scholarship, as some already do. That way the MFin can make its contribution to preventing a future financial crisis or at least limiting the damage it does.


(*) The official sector refers to public sector organisations engaged in policy. It excludes commercial or investment banks that are owned by the state. So in China, most of the large commercial banks are owned by the state but are not considered part of the official sector. China Development Bank is a policy bank and so it is.

  1. Terry Stratis

    As an economist, I agree with you completely. Central Banks stand to gain more from inter-disciplinary approaches than a rigid single minded focus. Although economics does offer a lot, finance provides different perspective which is invaluable. I think that even behavioral finance/economics could also have an enormous influence on policy decision making.

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