FIE442 Growth and Architecture of Financial Systems

• Topics

  Evidence accumulated over the last 20 years demonstrates that improvements in financial intermediation generate economic growth, both across countries and over time. We begin by surveying this literature and engaging 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 bank-based systems in more depth. 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 investigate the distinctive roles of central banks, 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).

  We then move on to an analogous consideration of market-based financial systems, investigating the distinctive roles of stock markets, mutual funds and insurance companies. What is the impact of stock market micro-structure? Is there a rôle for regional stock markets? How should insurance companies be regulated?

  The course will be largely empirical, drawing on both contemporary and historical evidence, but will be layered upon a theoretical skeleton.

• Learning outcome

  Knowledge

  Upon completion of the course, students will 

  • Understand the role of finance in generating economic growth.
  • Understand how the architecture of financial systems impacts their effectiveness.

  Skills

  Upon completion of the course, students will 

  • Be able to critically discuss and analyse the information and arguments presented in research papers that examine the link between finance and growth, as well as the links between financial architecture and financial system performance.
  • Be able to distinguish economically rational arguments from political rhetoric regarding the role and effectiveness of the financial system.

  General competence

  Upon completion of the course, students will 

  • Be able to lead an informed and coherent discussion about financial systems.

• Teaching

  The course is structured around the analysis of Harvard Business School cases. Students normally work in small groups to prepare for each class, and then we meet to discuss the key issues. All students are normally 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. The NHH requirement for autumn 2021 that students can fully participate whilst off-campus means that the classroom case analysis will be replaced by a recorded analysis of the case by the professor. We will then supplement this with 90-minute discussion sessions - held in person, or online, or both at the same time. (The exact format will be a function of our ability to meet, which is impacted both by the general coronavirus environment and the requirements of individual students). The details of this will be set when the constraints are known in the autumn but students both in NHH and away from NHH will be able to participate fully in the course, however it is run.

• Required prerequisites

  None.

• Requirements for course approval

  None.

• Assessment

  Individual written home exam, 3 hours.

  All answers must be written in English.

• Grading Scale

  A-F

• Computer tools

  None.

• Literature

  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 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. Third, background information is available in a standard investments textbook.

  Required readings:

  The collection of Harvard Business School cases; the collection of research papers.

  Recommended readings:

  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).