Bachelor 2020/2021

Principles of Banking and Finance

Type: Compulsory course (HSE University and University of London Double Degree Programme in Economics)

Area of studies: Economics

Delivered by: International College of Economics and Finance

Where: International College of Economics and Finance

When: 2 year, 1-4 module

Mode of studies: distance learning

Instructors: Кестнер Ирина Владимировна, Туманян Микаел Греникович, Кестнер Ирина Владимировна, Nina Azizova, Vincent Fardeau, Alina Myalo, Viktor Kimovich Shpringel, Vasilisa Shuklina

Language: English

ECTS credits: 8

Contact hours: 116

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. Course prerequisites Basic knowledge of micro/ macroeconomics and calculus/statistics, as taught in the first year at ICEF, is required. The course itself provides a basis (and thus serves as a prerequisite) for more advanced courses of in banking and finance such as Asset Pricing and Financial Markets, Corporate Finance, Investment Management, etc.

Learning Objectives

• The course provides students with foundational analytical and institutional knowledge in banking and finance.
• The first part of the course emphasizes the key concepts of modern theory of finance such as the time value of money, the absence of arbitrage, the trade-off between risk and expected returns, the notion of diversifiable risk and its implications for asset pricing, and the different forms and tests of market efficiency. At the end of this part, students should be able to discuss the main theoretical and empirical drivers of financial and real asset valuation. Students are also expected to acquire general knowledge about standard financial assets and the risks they carry.
• In the second part of the course, students learn about the consequences of asymmetric information and transaction costs on banking. At the end of the course, they should also be able to highlight the main differences between financial systems, explain the role and origins of financial intermediaries, the methods used by banks to manage various types of risk, and the rationale for bank regulation. Students are also expected to be able to discuss the main factors and developments of the 2007-2009 financial crisis.

Expected Learning Outcomes

• Discuss why financial systems exist, and how they are structured
• Explain why the relative importance of financial intermediaries and financial markets is different around the world, and how bank-based systems differ from market-based systems
• Understand why financial intermediaries exist, and discuss the role of transaction costs and information asymmetry theories in providing an economic justification
• Explain why banks need regulation, and illustrate the key reasons for and against the regulation of banking systems
• Discuss the main types of risks faced by banks, and use the main techniques employed by banks to manage their risks
• Explain how to value real assets and financial assets, and use the key capital budgeting techniques (Net Present Value and Internal Rate or Return)
• Explain how to value financial assets (bonds and stocks)
• Understand how risk affects the return of a risky asset, and hence how risk affects the value of the asset in equilibrium under the fundamental asset pricing paradigms (Capital Asset Pricing Model and Asset Pricing Theory)
• Discuss whether stock prices reflect all available information, and evaluate the empirical evidence on informational efficiency in financial markets

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 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). Diversication 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

• October written control papers
  The October midterm test will have four questions, without possibility of choice. All grades are given initially out of 100. The final grades are also transferred to 10- and 5-points grades in accordance with the ICEF Grading Regulations (par.3) available at https://icef-info.hse.ru/goto_icef_file_29833_download.html Для студентов она дистанте экзамен проводится в письменной форме с использованием асинхронного прокторинга. Экзамен проводится на платформе https://hse.student.examus.net). К экзамену необходимо подключиться за 10 минут до начала. Проверку настроек компьютера необходимо провести заранее, чтобы в случае возникших проблем у вас было время для обращения в службу техподдержки и устранения неполадок. Компьютер студента должен удовлетворять требованиям: 1. Стационарный компьютер или ноутбук (мобильные устройства не поддерживаются); 2. Операционная система Windows (версии 7, 8, 8.1, 10) или Mac OS X Yosemite 10.10 и выше; 3. Интернет-браузер Google Chrome последней на момент сдачи экзамена версии (для проверки и обновления версии браузера используйте ссылку chrome://help/); 4. Наличие исправной и включенной веб-камеры (включая встроенные в ноутбуки); 5. Наличие исправного и включенного микрофона (включая встроенные в ноутбуки); 6. Наличие постоянного интернет-соединения со скоростью передачи данных от пользователя не ниже 1 Мбит/сек; 7. Ваш компьютер должен успешно проходить проверку. Проверка доступна только после авторизации. Для доступа к экзамену требуется документ удостоверяющий личность. Его в развернутом виде необходимо будет сфотографировать на камеру после входа на платформу «Экзамус». Также вы должны медленно и плавно продемонстрировать на камеру рабочее место и помещение, в котором Вы пишете экзамен, а также чистые листы для написания экзамена (с двух сторон). Это необходимо для получения чёткого изображения. Во время экзамена запрещается пользоваться любыми материалами (в бумажном / электронном виде), использовать телефон или любые другие устройства (любые функции), открывать на экране посторонние вкладки. В случае выявления факта неприемлемого поведения на экзамене (например, списывание) результат экзамена будет аннулирован, а к студенту будут применены предусмотренные нормативными документами меры дисциплинарного характера вплоть до исключения из НИУ ВШЭ. Если возникают ситуации, когда студент внезапно отключается по любым причинам (камера отключилась, компьютер выключился и др.) или отходит от своего рабочего места на какое-то время, или студент показал неожиданно высокий результат, или будут обнаружены подозрительные действия во время экзамена, будет просмотрена видеозапись выполнения экзамена этим студентом и при необходимости студент будет приглашен на онлайн-собеседование с преподавателем. Об этом студент будет проинформирован заранее в индивидуальном порядке. Во время выполнения задания, не завершайте Интернет-соединения и не отключайте камеры и микрофона. Во время экзамена ведется аудио- и видео-запись. Процедура пересдачи проводится в соответствии с нормативными документами НИУ ВШЭ.
• Written examination
• Spring written control papers
• Final written examination
  University of London exam grade for the students studying the course for both Internal and International degrees; ICEF final exam grade for the students studying the course for Internal degree only
• Home Assignments
• Classwork
• Special December home assignment

Interim Assessment

• Interim assessment (2 module)
  0.1 * Classwork + 0.15 * Home Assignments + 0.25 * October written control papers + 0.2 * Special December home assignment + 0.3 * Written examination
• Interim assessment (4 module)
  0.1 * Classwork + 0.5 * Final written examination + 0.1 * Home Assignments + 0.08 * October written control papers + 0.048 * Special December home assignment + 0.1 * Spring written control papers + 0.072 * Written examination

Bibliography

Recommended Core Bibliography

• Corporate finance, Berk, J., 2007
• Financial institutions management : a risk management approach, Saunders, A., 2018
• Financial markets and institutions, Mishkin, F. S., 2018
• Principles of corporate finance, Brealey, R. A., 2008

Recommended Additional Bibliography

• Comparing financial systems, Allen, F., 2001
• Financial theory and corporate policy, Copeland, T. E., 2005
• The UK financial system : theory and practice, Buckle, M., 1998