Finance counsels

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 Ministry spokesman Eoin Dorgan said by telephone. Honohan 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 advisor to former Irish Prime Minister Garret Fitzgerald.

“It’s an extremely positive move,” said Brian Lucey, an associate professor of finance at Trinity. “He’s an expert in financial economics, banking. I can’t think of a better background to have in this environment.”

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 Finance Minister Brian Lenihan, who is giving the Irish central bank new powers.

‘Oblique’

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.

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.”

Retuned

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.”

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.”

Risk Sharing

Last month, he proposed a plan to share the risks associated with the bad bank, known as 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. Finance Minister Brian Lenihan said this week that he was examining the proposal.

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,” Lucey said. “But it’s good for Ireland. He’s well respected across Europe.”

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