Financial Intermediation

The course discusses selected topics in financial intermediation, with a particular focus on the role and management of financial institutions/banks. After a brief introduction into financial intermediation, the measurement and management of specific risks of financial intermediaries will be discussed. The course will then cover credit derivatives and credit risk transfer techniques. Credit risk transfer techniques have been widely discussed recently, mainly in the course of the subprime loan crisis in the U.S. Many international banks all over the world have incurred large losses resulting from participation in credit derivative transactions based on subprime loans. We will discuss the problems and potential dangers of credit risk transfers and possible remedies. We will then intensely discuss credit ratings and credit rating agencies. Rating agencies are often heavily criticised for their activities. We will discuss why rating agencies are criticised and if and how rating agencies should (and can) be regulated. The course then covers bank regulation and supervision. This part of the course will particularly focus on capital regulation and current approaches to bank regulation such as the capital adequacy guidelines set forth by the Basel Committee on Banking Supervision, widely known as Basel I, Basel II and Basel III. At the end of the course we will discuss the subprime loan crisis 2007/2008 and the Eurozone crisis, with a particular focus on the role of banks in the two crises, and we will have a look at selected international banks and banking systems.

The following topics are covered:

1. Introduction
2. Introduction into risks of financial intermediaries
3. Interest rate risk
4. Market risk
5. Credit risk
6. Credit ratings and rating agencies
7. Other risks of financial intermediaries
8. Regulation of financial intermediaries
9. The subprime loan crisis and the crisis of the Eurozone
10. International banks and banking systems

Literature

The course is based on the textbook: Saunders, A./Cornett, M.: “Financial Institutions Management – A Risk Management Approach”, latest available edition.

Teaching style

The individual topics will be presented by the lecturer. All students are required to read the relevant chapters/literature before the lecture in order to be able to participate in classroom. Besides the lectures, there will be an integrated exercise seminar. In the exercise seminars, exercises covering the respective topics will be handed out and the students have to solve the exercises in the classroom. The solutions will be discussed at the end of the exercise seminars.