According to recent news reports and academic literature, the U.S. banking industry could lose more than $250 billion from its exposure to mortgage securities. What went wrong and what can be done? On Sept. 19, a delegation from Rensselaer joined internationally recognized scholars, regulators, and financial market practitioners from Europe, Asia, and the United States to discuss the challenges stemming from the nation’s financial innovations of the past two decades, during the Sixth Annual Colloquium on Derivatives, Risk-Return, and Subprime, held in Lucca, Italy.
The Rensselaer delegation comprised members from the Lally School of Management & Technology, including: David Gautschi, dean of the Lally School; Iftekhar Hasan, the Cary L. Wellington Professor of Finance and editor of the Journal of Financial Stability; and Bill Francis, professor and co-director of the Ph.D program.
“The timing of this colloquium could not come at a better time,” said Hasan, a leading researcher in the field of banking and finance and also one of the organizers of the program. “The current financial crisis has caused unprecedented disruptions in the credit, mortgage, and other financial markets leading to a sharp decline in credit availability. This means that there is slower economic growth, and this is a real threat to global financial stability.”
The annual colloquium is sponsored by Associazione Guido Carli, Fondazione Cesifin “Alberto Predieri,” in collaboration with the International Center of Financial Research and the Journal of Financial Stability. The colloquium examines the roles played by banks as well as the vulnerability of banks, central bankers, and various non-bank entities in the creation of the crisis. Michael Spence, 2001 recipient of the Nobel Memorial Prize in Economic Sciences, former dean of Stanford University’s Graduate School of Business, and current chair of the Commission on Growth and Development, delivered the introductory speech.
With these developments in mind, along with the massive meltdown of the subprime market, colloquium participants also reviewed and suggested potential regulations and policy options that can be instituted to minimize the risk of any similar crisis in the future, noted Hasan.
“Our faculty anticipated that a financial crisis was imminent. Most importantly, the latest events heighten the inherent need for a commitment to the role of risk management, especially when dealing with complicated financial markets.
Changing times demand a new way to teach business leaders, and this is what we are doing at the Lally School,” said David Gautschi.
“This is an exceptional opportunity to discuss how interconnected the world’s financial institutions are, with a focus on innovations in financial services spawned in the United States,” Gautschi said. “Our faculty anticipated that a financial crisis was imminent. Most importantly, the latest events heighten the inherent need for a commitment to the role of risk management, especially when dealing with complicated financial markets. Changing times demand a new way to teach business leaders, and this is what we are doing at the Lally School.”
Established in 2005, the International Center for Financial Research strives to foster highest-quality research in the field of corporate finance, financial intermediation, capital markets, risk management, and computational finance. The center’s primary focus is to encourage research with a global exposure particularly aimed at exploring effective management and growth of individual businesses and sectors as well as the financial and economic growth at the local and regional level around the world.
“Understanding technology, innovation, and entrepreneurship is at the heart of the Lally School,” Gautschi added. “We do not think it serves society’s needs to focus exclusively on the stereotypical entrepreneur in a ‘garage shop’ on the demand side of markets for capital. We strive to understand technology, innovation, and entrepreneurship on the supply side of capital markets, as well.”
Next fall the Lally School will launch a new track of study in financial modeling and risk analytics to prepare students for careers that are in high demand in banking, financial services, and risk management positions in corporations around the world. Members of Lally’s Advisory Council have been instrumental in opening doors to players in the financial services industry to support this new track, Gautschi added.
“At the end of the day, our goal in developing the colloquium and future programs is to improve understanding of the complex financial issues that have graced news headlines, and explore how we can learn from past mistakes,” Hasan said.
A special forthcoming issue of the Journal of Financial Stability will include highlights from the colloquium.