(Course tought together with Casper de Vries)
Short description
Banks, insurers and pension funds feature daily in the financial press. Should banks, like Barings Bank in 1995, be allowed to fail? What are the benefits of bank supervision? How are we to structure reliable pension funds? Do financial conglomerates increase or lower the risks for the financial system? How to open up the European local banking systems?
In this course we address these kinds of questions by digging deeper. For example, due to asymmetric information it is difficult to bring the supply of and demand for credit together. The financial services sector is the intermediary which helps to overcome the divide. Due to the asymmetric information endemic to financial services, risk management is an integral part of the services delivered. In this course we will discuss how financial institutions’ management, regulators and supervisors may deal with the various risks that they face. We will discuss risk management on the level of an individual bank, or insurer, and on the systems level. Bank runs may put the whole sector and the real economy in danger. Therefore, regulation and supervision are an important aspect of the government interference with the financial sector.
The main topics of this course are:
Required reading:
Matthews & Thompson, The Economics of Banking, Wiley
Saunders & Cornett, Financial Institutions Management: A Risk Management Approach, McGraw-Hill Irwin
Period 1, September-October 2010
My written lecture notes for students contain the stories I tell and provide some more technical details and references. Some numerical examples are provided as Excel files.
These notes provide further technical explanations
* Interest rate future contracts, LNFEM11015_2_Interest rate futures.doc
Exercises/Assignments:
* Interest rate risk: numerical exercises
* Credit risk: numerical exercises
Supplementary reading:
* Goldman Takes Riskier Bets in Tough Times, WSJE 18 Dec 2002
* Confessions of a risk manager, The Economist 7 Aug 2008
* Don't blame banks' business models for the credit crisis. Blame their management, The Economist 14 Aug 2008
* LTCM, case description Alistair Milne 2005
* Metallgesellschaft, case description Alistair Milne 2005
* Orange County, case description Alistair Milne 2005
* Holton, Negatively Skewed Trading Strategies, Derivatives Week 12 (42), 2003