Objectives

The course financial institutions and regulation aims at giving you a better understanding (i) of the main economic roles financial intermediaries fulfill and (ii) of the current issues in financial regulation.

Contents

The course consists of two parts. The first part is theoretical and provides a short introduction into modern banking theory. We will discuss some seminal papers that shed light on the question why banks – and financial intermediaries in general – exist and what economic roles they fulfill. In particular, we will analyze how financial intermediaries mitigate frictions arising form asymmetric information and why this renders them inherently fragile and prone to liquidity crises. The second part is more practical and focusses on the regulation of banks. Based on the insights gained in the first part, we will discuss topics such as systemic risk & contagion, why banking is so tightly regulated in most countries, the capital structure & capital regulation of banks, and the “too big to fail” problem.

References

Main readings:

• Freixas, X. and J.C. Rochet „Microeconomics of Banking“, MIT Press, second edition
• Various scientific papers

Pre-requisites

Basic knowledge of microeconomics and game theory is essential.

Some acquaintance with economics of information and corporate finance is helpful but not needed.

Evaluation

First attempt

Exam:

Written 2h00 hours

Documentation:

Not allowed

Calculator:

Not allowed

Evaluation:

Written final exam (70% of the final grade) + group work (presentation or written report, 30% of the final grade).

The modalities may change depending on how the COVID-situation evolves.

Retake

Exam:

Written 2h00 hours

Documentation:

Not allowed

Calculator:

Not allowed

Evaluation:

The retake exam counts for 100% of the final grade.

The modalities may change depending on how the COVID-situation evolves.