Principles of banking and finance

2019/2020

Academic Year

ENG

Instruction in English

8

ECTS credits

Delivered at:

School of Business Informatics

Course type:

Elective course

When:

2 year, 1-4 module

Course Syllabus

Abstract

“Principles of Banking and Finance” is an introductory two-semester course for second-year undergraduate students. The course is taught in English. It is part of the University of London curriculum. The approach of the course is analytical and emphasizes the link between microeconomics and banking and finance. The first part of the course is devoted to principles of finance. It covers the essentials of capital budgeting and securities valuation, as well as basic asset pricing theories and the efficient market hypothesis. The second part deals with principles of banking. It compares different banking systems and discusses the standard tools of risk management for financial institutions, the regulation of the banking system, and the role and rationale of financial intermediation in the economy.

Learning Objectives

• Provide students with foundational analytical and institutional knowledge in banking and finance
• Emphasize the key concepts of the modern theory of finance
• Give students an understanding of the consequences of asymmetric information and transaction costs on banking

Expected Learning Outcomes

• Be able to discuss the functions of financial systems and types of financial systems with real-life examples.
• Learn different types of financial markets & financial instruments (stocks vs. bonds)
• Be able to understand financial literature on the basis of theoretical notions shown above
• Be able to proceed with different project valuation techniques (NPV<, IRR< SPB, DPB) and understand key differences
• Be able to perform valuation of bonds
• Understand the concept of yield curve, spot & forward rates
• Understand the concept of YTM
• Be able to understand the concept of mean-variance frontier, investors' choice with & without risk - free asset
• Apply the two - fund separation theorem as a prerequisite for asset pricing theories
• Learn the concept of CAPM & APT
• Be able to demonstrate the understanding of key differences between the models
• Be able to apply the models to piricng financial instruments
• Learn the key constituents of stock pricing
• Be able to apply stock pricing formula for the resulting price calculation
• Be able to understand the concept of efficient markets including different forms of market efficiency and explanatory theories
• Learn the current state of financial structure, including crisis events
• Learn different types of financial intermediaries
• Be able to demonstrate understanding of differences in functions, investment strategies
• Learn the risks assosiated with the banking business
• Be able to demonstrate the understanding of models used by banks to mitigate those risks
• Learn the peculiarities of Basel I, Basel II and Basel III
• Learn the difference between bank - and market - based financial systems, including historical background

Course Contents

• Introduction
  Course overview. Overview of the financial system
• Financial markets and instruments
  Functions of the financial system. Types of financial intermediaries. Financial instruments (debt, equity, derivatives). Market structures (OTC vs centralized exchanges, primary vs secondary markets, etc.). Money and Capital Markets
• Capital Budgeting and Valuation
  Fisher separation theorem. Methods of project's valuation. Cash Flows. Concepts of present value and opportunity cost of capital. NPV, IRR, Payback period
• Valuation of Fixed-Income Securities
  Coupon and Discount Bonds. Annuities and Perpetuities. Valuation by absence of arbitrage. Yield Curve. Term Structure Theories. Corporate bonds
• Risk and return
  Mathematical characteristics of risk and return. Risk premia. Risk-return trade-off. The risk and return of the portfolio. Correlation of returns. Benefits of diversification. Systematic and non-systematic risks. Mean-variance portfolio theory: Efficient Frontier, Capital Market Line, Tangent portfolio, Two-fund separation theorem
• Asset pricing theories
  CAPM and securities market line. Single- and multi-factor models. Factor-replicating portfolios. Arbitrage Pricing Theory (APT). Theoretical and empirical validation of CAPM and APT
• Stock valuation
  Valuation of Stocks: Fair Price. DCF Models. Gordon Growth Model
• Efficient markets
  Weak, semi-strong, strong efficiency. Empirical tests of the weak-form: technical analysis, momentum and reversal, Seasonal effects. Empirical tests of the semi-strong form: performance of professional investors, event studies. Tests of the strong-form: Insider trading. Rational (friction-based) vs behavioral explanations of anomalies
• Economic analysis of the financial structure
  Why do financial intermediaries exist? Transaction costs. Asymmetric information: adverse selection and moral hazard, principal-agent problem. Maturity, size and risk transformation. Economy of scale and economy of scope. The ways to minimize principal-agent costs: collateral, guarantees, capital requirements, self-regulation, credit bureaus
• Financial intermediation
  Direct and indirect finance. Banks. S&L institutions. Co-operative banks. Mutual funds. Pension funds. Insurance companies. Term structure of liabilities. The problem of excess regulation. Disintermediation
• Bank management: retail, wholesale, investment banks
  Retail banking: current account and time deposits, micro-financing, consumer loans, mortgages, asset-backed securities, payment and credit cards. Wholesale banking: large-scale loans, trade financing, loan commitments, commercial and standby letters of credit, asset management, syndicated loans, arrangement and underwriting of corporate bonds. Investment banks: structure of transactions, risk sharing, syndicated loans, arrangement and underwriting of bonds
• Risk management and internal control in banks
  Asset-side and liability-side liquidity risks. Liquidity gaps. Liquidity management and the role of reserves. Asset-liability management. Purchase of funds. Treasury. Interest rate margin. Interest rate risk. Fixed- and floating-rate assets and liabilities. Interest rate gaps. Credit risk. Types of credit risk (industrial, regional and country risks). Diversification of loan portfolio. Currency risk. Long and short open positions. Capital adequacy. Economic capital
• Banking regulation
  Banking supervision and inspection (on-sight and off-sight regulation). Capital adequacy ratio. The Basel accords on risk-based capital requirement (Basel I and Basel II). Liquidity ratios. Open currency positions. CAMEL. Disclosure requirements. Free banking. Government safety nets. Deposit insurance. Banking crises
• Financial Systems Compared
  Bank-based and market-based systems. Islamic banking. Emerging markets. Financial crises: banking, currency and debt crises. The peculiarities of the Russian banking systems

Assessment Elements

• Homework assignments
• Classwork
• December exam
• October mid-term test
• March mid-term test
• Final exam
  Examination format: The exam is taken written. The platform: The exam is taken on Canvas, Zoom platforms. Students are required to join a session 15 minutes before the beginning. The computers must meet the following technical requirements: https://docs.microsoft.com/ru-ru/microsoftteams/hardware-requirements-for-the-teams-app A student is supposed to follow the requirements below: Check your computer for compliance with technical requirements no later than 7 days before the exam; Sign in with your corporate account (@edu.hse.ru); Check your microphone, speakers or headphones, webcam, Internet connection (we recommend connecting your computer to the network with a cable, if possible); Prepare the necessary writing equipment, such as pens, pencils, pieces of paper, and others. Disable applications on the computer's task other than the Zoom, Canvas application or the browser that will be used to log in to the Zoom, Canvas If one of the necessary requirements for participation in the exam cannot be met, a student is obliged to inform a professor and a manager of a program 2 weeks before the exam date to decide on the student's participation in the exams. Students are not allowed to: Turn off the video camera; Use notes, textbooks, and other educational materials; Leave the place where the exam task is taken (go beyond the camera's viewing angle); Look away from your computer screen or desktop; Use smart gadgets (smartphone, tablet, etc.) Involve outsiders for help during the exam, talk to outsiders during the examination tasks; Read tasks out loud. Students are allowed to: Write on a piece of paper, use a pen for making notes and calculations; Use a calculator; Turn on the microphone to answer the teacher’s questions; Ask a teacher for additional information related to understanding the exam task; Interact with other students if allowed. Connection failures: A short-term communication failure during the exam is considered to be the loss of a student's network connection with the Zoom for no longer than 1 minute. A long-term communication failure during the exam is considered to be the loss of a student's network connection with the Zoom for longer than 1 minute. A student cannot continue to participate in the exam, if there is a long-term communication failure appeared. The retake procedure is similar to the exam procedure. In case of long-term communication failure in Zoom during the examination task, the student must notify the teacher, record the fact of loss of connection with the platform (screenshot, a response from the Internet provider). Then contact the manager of a program with an explanatory note about the incident to decide on retaking the exam.

Interim Assessment

• Interim assessment (4 module)
  0.1 * Classwork + 0.12 * December exam + 0.5 * Final exam + 0.1 * Homework assignments + 0.1 * March mid-term test + 0.08 * October mid-term test

Bibliography

Recommended Core Bibliography

• Financial markets and institutions, Mishkin, F. S., 2018

Recommended Additional Bibliography

• Financial theory and corporate policy, Copeland, T. E., 2005