Introductory description

This module is an elective for WBS and non-WBS students.

The module aims to provide an overview of financial systems, to discuss their functions, risks and regulations.

Module web page

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.

An introduction to fiancial systems, emphasizing their functions of fianncing and risk-sharing. An overview of market-oriented and bank-oriented financial systems, historical development and cross-country comparisons.

Comparing Intermediated financing (such as bank loans) to direct market financing (such as corporate bonds). Discussing banks' advantage as inside creditors as well as the dark side of bank financing.

Illustrating banks' role in corporate liquidity provision and market making.

bank runs, and deposit insurance.

Discussing the financial system's function of risk sharing, with examples of deposit contract in providing liquidity insurance and pension funds in intertemporal risk sharing. Illustrating banks' role in asset and liability transformation (from risky to risk-free assets, and from monitored to unmonitored liabilities).

An introduction to the contemporary trend of banking: securitization, shadow banking, and the transition from retail to wholesale banking.

Understanding bank risks, particularly the risk of bank runs. Illustrate bank risk-taking incentives: how it relates to leverage and financial safety net. Providing an overview of systemic crises, credit cycles, and the interplay between banking crisis and sovereign bond crisis.

An introduction to bank capital regulation, with a discussion on the evolution of Basel Accord. Also discussing macro-prudential regulations that aim to mitigate systemic risks.

Learning outcomes

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

• Understand banks' role in providing intermediated financing and corporate liquidity.
• Understand the function of bank deposits, and the intertemporal risk sharing provided by financial institutions.
• Understand the advantages and disadvantages of bank financing.
• Understand why some risks are inevitable to banking activities.
• Critically assess contemporaneous issues in financial regulations.

Indicative reading list

Arnoud Boot, Stuart Greenbaum and Anjan Thakor, Contemporary Financial Intermediation, 3rd ed. Academic Press, 2015.
Tirole, Jean. The Theory of Corporate Finance. Princeton University Press, 2006.
Freixas, Xavier and Jean-Charles Rochet. Microeconomics of Banking 2nd ed. MIT Press, 2008.

Subject specific skills

For the purpose of bank risk management, understanding the principle of credit risk analysis, and that of duration gap analysis.

Transferable skills

For the purpose of bank risk management, understanding the principle of credit risk analysis, and that of duration gap analysis.