By Fergal O’Brien and Ian Guider
Sept. 4 (Bloomberg) -- Ireland named finance professor Patrick Honohan to run the country’s central bank, giving him supervisory power over a banking industry that almost collapsed last year and a voice in monetary policy across the euro region.
Honohan, 59, will succeed John Hurley, who retires later this month, Finance Minister Brian Lenihan said in Dublin late yesterday. He is currently a Professor of International Financial Economics and Development at Trinity College Dublin.
Honohan takes over as Ireland revamps its banking system amid the worst recession in the country’s history. An expert on banking, Honohan brings both economic and political skills to the job, having worked at the World Bank and as an adviser to former Irish Prime Minister Garret Fitzgerald.
“He’s not just an Irish expert on banking, he’s an expert of international renown,” said Karl Whelan, a professor at University College Dublin and a former economist at the Federal Reserve in Washington. “There’s some incredibly impressive people on the ECB council, and if you want to have your voice heard, it helps to have a resume like Patrick’s.”
While Honohan won’t have power over the so-called bad bank set up by the government to clear banks’ balance sheets, he will have responsibility for the stability of the financial system and the supervision of individual firms. Currently, the latter is managed by an autonomous regulator within the central bank.
“Throughout this financial crisis, I have sought the views of Professor Honohan and he has consistently provided valuable advice,” said Lenihan.
‘Honored’
The appointment of the academic marks a break from Ireland’s traditional policy of appointing a top ranking government official to the central bank role. Honohan said in a phone interview that he was “honored and delighted” to have the opportunity “to help stabilize” the financial sector and the economy. He declined to comment further.
Honohan will also join the European Central Bank’s 22- member Governing Council and has described President Jean-Claude Trichet’s style of communication as “oblique.”
“I think the big issue will be negotiating Ireland’s position within the ECB, making sure Ireland has the support of the ECB in sorting out its difficulties,” said Frances Ruane, Director of Ireland’s Economic & Social Research Institute.
The ECB said Aug. 31 that the bad bank, know as the National Asset Management Agency, must not make “undue premium payments” to banks when it takes over their loans.
Retuned
Honohan has criticized Irish economic policy in the past, saying that the lower interest rates inherited when the country adopted the euro in 1999 weren’t solely to blame for the credit- fueled boom over the following decade.
Joining the euro was “neither necessary nor sufficient for a crisis,” Honohan said in a paper delivered in Dubrovnik in June. “The Irish authorities did retain sufficient policy instruments to have combated the emergence of imbalanced; they simply did not use them effectively.”
Irish policies were “not retuned to take account of the fact that, following euro membership, financial markets were no longer offering an early warning system,” he said. “Corrective action that could and should have been taken were neglected as a result.”
Honohan supports the idea of a euro-region bank regulator, writing on the Irish Economy Web site in January that he has “long been an advocate” of such a move.
“Isn’t it now obvious that we in Ireland should be cheerleaders for an early move in this direction?” he said. “We urgently need all the help we can get in financial regulation -- even for nationalized banks.”
Risk Sharing
Born in Dublin in 1949, Honohan studied economics and mathematics at University College Dublin, where he graduated with first-class honors in 1971. After a masters degree at UCD, he completed a doctorate at the London School of Economics, where his dissertation was “Uncertainty, Portfolio Choice and Economic Fluctuations.”
Last month, he proposed a plan to share the risks associated with the National Asset Management Agency between the government and banks.
This would involve a two-part payment for the loans, with the second part made in the form of a stake in the agency. Lenihan, who is examining the proposal, said today that there “has never been a divergence” between him and Honohan on NAMA.
Married with one son, Honohan worked as an economist at Ireland’s central bank from 1976 to 1984 and was at the World Bank from 1987 to 1990 and again from 1998 to 2007. He has been at Trinity since 2007.
His academic papers have covered topics from divergent inflation rates in monetary unions to banks’ risk-management models and financial supervision in developing economies.
“The appointment is a loss for academia,” said Brian Lucey, an associate professor of finance at Trinity. “But it’s good for Ireland. He’s well respected across Europe.”
To contact the reporter on this story: Fergal O’Brien in Dublin at fobrien@bloomberg.net; Ian Guider in Dublin at iguider@bloomberg.net.
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