Introductory description

The aims of this module are:
to explore the rationale behind financial regulation and supervision: what are the market failures regulators are addressing, and what are the tools which are used
to explore critical, policy relevant, questions in financial regulation which have seen scholarly study: the benefits of narrow banking; the threat of competition to financial stability; managing the tension between deposit insurance and moral hazard; too-big-tofail; remuneration and incentives; and resolution challenges.

Module aims

Outline syllabus

This is an indicative module outline only to give an indication of the sort of topics that may be covered. Actual sessions held may differ.

Universal Banking versus Narrow Banking

• History to Glass Steagal Act
• Theoretical weaknesses of universal banking and of narrow banking
• Empirical evidence on the problems with Universal banking
• Ring Fencing and ease of resolution

Competition and Financial Stability

• Competition damages Financial stability – Keeley, Allen and Gale
• Competition safeguards financial stability (Boyd and De Nicolo)
• Evidence, including from credit rating agencies

Distortions from Regulation

• Deposit guarantees and bank moral hazard
• Insurer moral hazard arising from insurer payout guarantees and third party cover
• Optimal Deposit Insurance. IADI principles
• Risk weights – optimal level and distortive outcomes

Too Big To Fail

• Evidence that TBTF exists
• Implications for bank behaviour – clustering in asset selection. Fahri and Tirole
• Stress Testing and optimal disclosure

Basel III and Solvency II

• Introduction to VaR

Remuneration

• Regulatory principles
• Bonus cap distortions
• Clawback and Malus

Learning outcomes

By the end of the module, students should be able to:

• Demonstrate an in depth understanding of financial regulation and supervision covering both banking and insurance
• Integrate theory and practice relevant to a wide range of central banking and financial regulation practices and relevant functions in different contexts
• Demonstrate the ability to apply knowledge of financial regulation and supervision to other areas of central banking -
• Demonstrate an understanding of the critical issues concerning the intellectual justification for financial regulation and overt monitoring
• Demonstrate an ability to consume and understand detailed investigation and research into relevant central banking and financial regulation issues
• Develop an understanding of critical, policy relevant, questions in financial regulation which have seen scholarly study
• Demonstrate a critical awareness of current issues, research and advanced scholarship in regulation and monitoring and the arguments used to justify their intrusiveness and use
• Reflect on and learn from some prior experience and thus be able to integrate new knowledge with past experience and apply it to a new situation
• Make sound judgements whilst understanding the limitations on judgements made in the absence of complete data

Indicative reading list

• Allen and Gale, 2004, Competition and Financial Stability, Journal of Money, Credit, and Banking, 36(3), 453-480.
• Beck, Demirgüç-Kunt, and Levine, 2006, Bank Concentration and Crises, Journal of Banking and Finance, 30 (5): 1581-1603.
• Boyd, De Nicoló, 2005, The Theory of Bank Risk-taking and Competition Revisited, Journal of Finance, 60 (3): 1329-1343.
• Keeley, 1990, Deposit Insurance, Risk, and Market Power in Banking, The American Economic Review, 80(5), 1183-1200.
• Freixas, Xavier and Jean-Charles Rochet, 2008, Microeconomics of Banking, MIT press.
• Hull, John 2015, Risk Management and Financial Institutions, Wiley.

Subject specific skills

• Develop the skills to critique controversial features of regulation and laws
• Understand legal and economic discussions relating to the rationale for financial regulation of banks and insurance companies
• Draw on a range of concepts, information, techniques and perspectives in the area of financial regulation and supervision

Transferable skills

• Written communication
• Independent learning