The Impact of Academic Research on Industrial Performance (2003) / Chapter Skim
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6. Report of the Panel on the Financial Services Industry
6. Report of the Panel on the Financial Services Industry
Pages 173-204
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From page 173... ...
The panel reviewed the literature and sent a questionnaire to experts in academia, the financial services industry, and government. The questionnaire was followed by a workshop attended by 21 senior individuals in the financial services sector (see Addendum)
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From page 174... ...
Information technologies, the Internet, risk modeling, and the creation of new markets in derivatives and other financial instruments have accelerated the pace and volume and increased the efficiency of financial transactions, at the same time driving the industry to make significant investments in new technologies. For instance, financial services firms account for more than 60 percent of investments in information technology in the United States.
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From page 175... ...
This approach provides a sense of the changes taking place in the industry over time. Functional View The first function of the financial services industry is the packaging and description of securities for consumers and businesses.
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Because of changes in industry structure, regulatory environments, the scope of services, and technological capabilities, the boundaries of the current financial services industry are very difficult to define, and may be even more difficult to define in the future. New firms that are not in the conventional circle of financial services are providing traditional functions.
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From page 177... ...
Many firms whose primary line of business is unrelated to financial services are integrating financial capabilities into their traditional business offerings to provide innovative business approaches. This trend is especially prevalent in the world of e-commerce and Internet business.
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Third, government regulation will be promulgated according to where the boundaries are drawn. INNOVATION SYSTEM Changes in the past 20 years have fundamentally changed the markets, the way customers interact with service providers, and the range of products in the financial services industry.
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Institutional Drivers Academic research has played an important role in innovation in the financial services industry, but a number of other players and factors have also contributed significantly. The players are (in no particular order)
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Management consulting firms, for instance, have developed the following innovative frameworks for measuring a company's economic performance: activity-based costing (a refinement of standard accounting practice that allocates costs to specific business activities) economic value added (EVA(~)
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Software Developers and Hardware Manufacturers The financial services industry relies heavily on technology developed in other industries, especially information technology, computers, communications equipment, and software. In a compilation of R&D spending on information technology in 500 end-user organizations, banking and financial services had the largest budget (9 percent)
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From page 182... ...
The risk-management group, called the Counterparty Risk Management Policy Group, included Barclays Bank PLC, Bear Stearns & Company, Chase Manhattan Corporation, Citigroup, Inc., Credit Suisse First Boston, Deutsche Bank, Lehman Brothers, Inc., Merrill Lynch and Company, Inc., Morgan Stanley Dean Witter, and Warburg Dillon Read, a unit of UBS AG. The stated purpose of the group is to enhance existing risk-management practices and to compile information that could be reported to "regulators and supervisors, all with a view to enhancing the discipline, efficiency and liquidity of financial markets." (Bloomberg Information, 1999~.
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From page 183... ...
They are usually scattered throughout the organization, including the small business units, where they are often indistinguishable from traders and other personnel. CONTRIBUTIONS OF ACADEMIC RESEARCH The links between academic research and the financial services industry are not nearly as well established as they are in many other industries.
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The financial services industry can be widely defined to include just about all business applications dealing with financial information. Our focus on the narrow area of financial engineering illustrates the relationship of academic research and subsequent applications in industry.
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in 1981 for his work on portfolio diversification and "two-fund separation theory," which along with the Capital Asset Pricing Model, developed by William Sharpe, provided the conceptual foundations for index funds. Tjalling Koopmans (Yale)
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, and others formulation and solution to problems of portfolio optimization begun by Harry Markowitz when he was a doctoral student at University of Chicago and continued by many others, such as Michael Dempster at Cambridge, John Mulvey at Princeton, Stavros Zenios at the University of Cyprus, and William Ziemba at the University of British Columbia methods of analyzing financial time series, especially models that incorporate autocorrelation and varying volatility (e.g., autoregressive conditional heteroskedasticity [ARCH] models, introduced by Robert Engle, New York University, in 1982, and their variants)
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finance. The University of Michigan Panel Study of Income Dynamics covers some financial behavior, and the Credit Research Institute also does some work in this area.6 But little academic research focuses directly on how financial institutions can influence customer behavior (business strategies)
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(For more about networking technology, see discussion in Chapter 2.) TRANSFER MECHANISMS A pattern has developed for transferring the results of academic research to the financial services industry.
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· portfolio theory · market microstructures Financial Information and Research Tools · online information services (mixed academic-industry heritage) · online investment services · off-the-shelf risk-management software · risk metrics/credit metrics Transactions · cryptography · electronic commerce/world wide web (mixed academic-industry heritage)
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From page 190... ...
The financial services industry can be divided into two fundamental areas: (1) securitization, or the packaging and bundling of financial products or services for consumers or businesses (security bundling)
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This experience demonstrated that the pricing formulas used in many financial models do not account for periods of economic turmoil and alerted the financial community to these pitfalls and limitations. OPPORTUNITIES FOR FUTURE ACADEMIC RESEARCH A broad range of academic research in engineering, natural sciences, economics, mathematics, social sciences, and public policy will continue to contribute to the success of the financial services industry: · identification of rogue traders · allocations of capital to various activities · the dynamics of markets (stochastic models)
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From page 192... ...
Connecting the academic research base with the financial services industry remains an ongoing challenge as well as an important opportunity. Although it is difficult to predict the future significance of academic research, the increasing innovation and complexity of financial services will probably prove to be a rich and fertile area for future academic research.
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From page 193... ...
At the same time, engineers can also learn from engaging with the financial services industry, particularly in the areas of stochastic and modelbased approaches to problem definition and solution. Recommendation 6-1.
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Today, academia provides much of the human capital for the financial services industry. Business schools, for instance, train large numbers of practitioners for the industry, including many who advance to senior management levels.
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Given the sheer size and importance of the financial services sector to the nation's economy, measures of innovation and of the relationship between innovation and economic performance should be developed for the financial services industry. Although defining the end product of financial services will be difficult, focused research on this problem could reveal suitable measurements.
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Recommendation 6-lOb. Financial services companies should establish consortia/ cooperative research to define and build a technological infrastructure and knowledge base for various sectors of the financial services industry.
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New York: Counterparty Risk Management Policy Group. Duffie, D., and K
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2. Overall, would you describe the impact of academic research on industrial performance in the financial services industry over the past 20 years as (Please put an X in one box)
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5. What are significant emerging trends or problems that the financial services industry will face in the future that could benefit from academic research?
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Panel Discussion of the Financial Services Innovation System: Understanding the Process, Players, and Trends Chester Spatt, Mellon Bank Professor of Finance, and Director, Center for Financial Markets, Carnegie Mellon University William W Lang, Deputy Director for Special Studies, Office of the Comptroller of the Currency Joe Dauber, Vice President, Customer Management, Novus Services, Inc.
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Harker, Department of Operations and Information Management, The Wharton School, University of Pennsylvania Colin Carlton, Chief Investment Officer, Canada Trust Investment Management Group 3:45 p.m. Academic Research and Financial Services: Where Are We Going?
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Colin G Carlton Chief Investment Officer Canada Trust Investment Management Group Joe Dauber Vice President, Customer Management Novus Services, Inc.
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Spatt Mellon Bank Professor of Finance and Director, Center for Financial Markets Carnegie Mellon University Morris Tanenbaum~ Retired Vice Chairman and CFO AT&T Eric Thorlacius Vice President Falcon Asset Management Jack E Triplett Brookings Institution Andrew B
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