FIE442 Growth and Architecture of Financial Systems
Evidence accumulated over the last 20 years demonstrates that improvements in financial intermediation generate economic growth, both across countries and over time. We survey this literature and engage with some of its subtleties - such as the relative merits of bank-based and market-based financial systems, and the role of different legal systems in determining the level and pattern of investment.
We then consider market-based systems in more depth. We put debt, equity and derivatives under the microscope. We investigate the distinctive roles of stock markets, mutual funds, private equity and pension companies. What functions do these components of the system fulfill? What are their strengths and weaknesses? How has the financial system and government regulation evolved to build on their strengths and offset their weaknesses?
We then move on to an analogous consideration of bank-based financial systems. We investigate the distinctive roles of deposit banks, investment banks and universal banks in the system. We examine the causes and consequences of runs on individual banks as well as contagions between banks. We consider the merits of both "narrow banking" and "local banking", in terms of their efficiency, equity and stability. We examine the roles of local, national and international regulation (such as the Basel Accords).
The course will be largely empirical, drawing on both contemporary and historical evidence, but will be layered upon a theoretical skeleton.
Upon completion of the course, students will:
- Be able to discuss the characteristics and functionality of key financial institutions and instruments
- Be able to recognise how institutions and instruments combine to create a "financial system"
- Be able to assess how the architecture of financial systems impacts their effectiveness
- Be able to discuss how finance can generate economic growth
- Be able to evaluate how legal and regulatory foundations impact the effectiveness and efficiency of financial institutions
- Be able to analyse and critique the structure and behaviour of financial institutions and instruments
- Be able to explain and explore the links between finance and growth, and the links between financial architecture and financial system performance
- Be able to find and evaluate arguments and evidence from research papers, reports, case studies, the media and other sources
- Be able to lead an informed and coherent discussion about financial systems
The course is structured around the analysis of Harvard Business School cases. Students work in small groups to prepare for each class, and then we meet in person to discuss the key issues. All students are expected to fully participate in every case discussion. For each case, every group member should read (at least) one of the items on the reading list - in addition to the case itself - and then discuss it with the rest of the group. In this way, most or all of the reading materials assigned each week will be covered by every group before the class. The group can use this discussion to prepare their responses to the accompanying assignment questions, which we discuss in class. Students are required to participate actively and regularly in order to be able to take the exam.
There will be no digital or hybrid alternative provided for this course. Students who find that they unexpectedly cannot attend a significant number of classes - due to illness, for example - will be required to submit a piece of written work in lieu of physical participation in order to take the exam. Please note that students who do not attend the majority of classes, for whatever reason, put themselves at a serious disadvantage in terms of attaining a high grade in this course.
There are no prerequisites.
Many students on the course come from abroad, and so bring a wide range of knowledge and experiences to the classroom. Hence we assume no specific prior knowledge and cover everything that students need in order get a top grade.
Students must participate actively and regularly in class in order to be eligible to take the exam.
Students who are unable to participate in class - due to illness, for example - will be required to submit a piece or written work in lieu in order to be eligible to take the exam.
Individual written school exam, 3 hours.
All answers must be written in English.
First, each week's class discussion will revolve around a business case; the case collection should therefore be purchased by students, using the link to the course pack prepared on the Harvard Business School Publishing website. Second, the cases will be supplemented each week by a selection of research papers that are freely downloadable from the web, either in Leganto or posted on Canvas. Third, background information is available in a standard investments textbook.
The collection of Harvard Business School cases; the collection of research papers.
Occasionally, students may want to do some background reading from the textbook Investments by Zvi Bodie, Alex Kane and Alan J. Marcus (10th edition, McGraw Hill, 2014).
Permitted Support Material
One bilingual dictionary permitted.
- ECTS Credits
- Teaching language
Autumn. Offered autumn 2023.
Professor Liam Brunt, Department of Economics.