New Penn State research center to study global financial risk

UNIVERSITY PARK, Pa. -- Penn State has formed a new, interdisciplinary research center to study the strength and security of the global financial system. The Center for the Study of Global Financial Stability seeks to build academic, government and industry partnerships to engage in joint research efforts that will develop a better understanding of the complexity of the global financial markets and help improve international financial stability.

A joint effort between several colleges and units at Penn State, the center is being led by John Liechty, professor of marketing and statistics at the Smeal College of Business. The center is engaging a broad range of key faculty members from around the University as well as leading practitioner experts in banking, information technology and computer science. The main objective of the center is to contribute to the understanding of the global financial system and identify new approaches to use data to monitor the global financial system and enhance its stability, ultimately leading to improved financial regulation, better-informed policy decisions, and industry-led, market-driven stability initiatives.

Liechty's interest in the global financial system was piqued during a 2009 academic workshop on financial risk, where, during one of the discussion sessions, he asked what federal agency was in charge of monitoring the entire system for risk. There wasn't one. So Liechty and a handful of colleagues spent the next year and half working to change that by conducting research, gathering industry support and meeting with members of Congress to explain the need. When U.S. President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act last year, he created the Office of Financial Research (OFR), a new federal watchdog growing out of Liechty's question at the conference 18 months earlier.

While the Penn State's Center for the Study of Global Financial Security has no direct ties to the OFR, its overarching goal is to make the agency's job easier and more effective.

"We want to find new data in the financial system and new ways to collect and analyze that data that will help academia, industry and government monitor the health of the global financial system," Liechty said. "Our ultimate goal is to improve financial security."

In addition to Liechty and a handful of colleagues at Smeal, the new center incorporates the expertise of Penn State faculty members in the Applied Research Laboratory, College of Engineering, College of Information Sciences and Technology, College of Liberal Arts and Eberly College of Science. Liechty is exploring collaborations with other Penn State units, too.

"With the depth and breadth of knowledge that the Penn State faculty possesses in such a wide range of disciplines, the University is the perfect home for an organization doing such vital work," said Peter Schiffer, associate vice president for research at Penn State and a member of the internal advisory board of the Center for the Study of Global Financial Stability. "We've gathered the best minds in information technology, statistics, finance and more, to gain a better understanding of the global financial system and its interconnectivity."

"The recent financial crisis has exposed vulnerabilities in the financial sector and made us ask hard questions about systemic risks," said Arvind Rangaswamy, Smeal senior associate dean for research and faculty and another member of the center's internal board. "This new research center will allow us to break new ground in data analysis, providing industry and government with better tools to forecast major disruptions to the financial system and for understanding systemic risks in the global economy."

In addition to Schiffer and Rangaswamy, the internal advisory board consists of Patricia Gruber, deputy director of the Applied Research Laboratory; Bill Kracaw, chair of the Department of Finance; Padma Raghavan, professor of computer science and engineering and director of the Institute for CyberScience; and Andrew Stephenson, associate dean for research in the Eberly College of Science.

Liechty and the board are currently in the process of establishing an external advisory board and finalizing the center's complete slate of activities. Already this semester, the center has hosted several seminars with guest speakers from the Board of Governors of the Federal Reserve System and J.P. Morgan, among others. The fall seminar series will continue on Oct. 19 with a talk by Heber Farnsworth, assistant professor of finance at Smeal. The complete seminar series schedule is available at stability.psu.edu/seminar-series-1 online.

The center is also planning on hosting conferences and workshops and making its website a repository for information on the stability of the financial system. The site will feature econometric tools that can be used by other researchers and the general public to assess the financial system. Eventually, it will keep visitors up to date with information on related regulatory changes under proposal in Washington. There are also plans in the works to publish online a daily assessment of the risks posed to the financial system.

"At some point, with the right analysis, government and industry leaders will be able to predict the next financial crisis and avoid it or at least lessen its effect," Liechty said. "The Center for the Study of Global Financial Stability seeks to identify the data, tools and techniques to make this future a reality."

For more information on the Center for Study of Global Financial Stability, visit stability.psu.edu online.

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Last Updated October 24, 2011