FIN41670

Banks are unique institutions. They are the guardians of the traditional payment system used by all of us on a daily basis. They act to “grease the wheel” of commercial activity across the entire economy, smoothing consumption and investment over the lifetime of households and firms, intermediating funds to borrowers from agents with savings, creating liquidity through lending. However, given their central role in all of our economic lives, they are also potentially fragile institutions. They transform liquid deposits into long term investments such as loans and securities. They are highly leveraged. Given the maturity mismatch inherent between their loan and deposit books along with the “fractional reserve” nature of their balance sheet, they are permanently at risk of a “bank run”, where the amount of liquid assets available cannot meet the claims of all depositors. On top of all of this, banks are interconnected to the rest of the economy to such a degree that, when banking crises occur, systemic economic crises with prolonged aggregate effects usually ensue.

This module aims to provide students with fundamental principles of banking. Students will learn about the unique nature of banks, the structure of their balance sheet, and the economics of financial intermediation. Upon this core understanding, we will build up an understanding of the ways in which regulators try to reduce the riskiness of the banking sector, to mitigate the risk of bank failures and systemic crises. This will include a historic view on the pre-crisis regulatory environment (“Basel one and two”) as well as the post-financial-crisis regulatory response.