Financial Institutions and Regulation

EMEC009S6 (30 credits)

Aims

This course provides an introduction to the theory of financial market failure and regulation. It integrates modern theories of asymmetric information into the analysis of financial institutions, relating the theory to current developments.

Objectives

The module provides the basis for:

• informed debate on the reasons for financial market failure and the rationale for financial regulation, with reference to topical issues;
• an understanding of the structure of the markets for fund management, insurance, capital, and banking services, with particular reference to their informational structure and the tasks faced by the regulator in each case;
• an understanding of how financial institutions interact with, and affect, the wider economy;
• an understanding of the main differences between the various financial systems existing in the world today;
• an informed assessment of the current regulatory regime in the UK;
• an appreciation of current issues under discussion in the press, particularly those most relevant to the coursework project.

On completion of the module, the student will have gained a familiarity with the theoretical concepts encountered in the current technical literature on financial issues.

The concept of asymmetrical information will be illustrated in connection with current issues of intermediation and problems of agency.

The coursework essay project will have provided an opportunity for applying economic theory to a topic chosen by the student.

Teaching Arrangements

• The weekly programme consists of a one-hour lecture followed by a one-and-a-half hour class.
• The theoretical aspects of the module draw mainly on the textbook:
  Spencer, PD (2000), The Structure and Regulation of Financial Markets. Oxford University Press.
• The classes focus on a number of formal models, each of which is based on a seminal article in the financial literature. The models will be presented by means of worksheets based on the simplified versions given in the above textbook, but it is recommended that an attempt is also made to read the original articles on which they are based.

Assessment

• Coursework (20%): “Assess the experience of the current framework for financial regulation in the UK”.
• Exam (80%): Three-and-a-quarter hour formal examination in June.

Lecture topics

• Financial system in crisis: some background.
• Financial institutions: the market for fund management as an example.
• Financial regulation.
• The market for insurance and its regulation.
• Capital market microstructure.
• Insider trading.
• Shareholders, management and conflict of interest.
• Intermediation theory.
• Excessive risk-taking.
• Liquidity requirements and systemic risk.
• Banking regulation in Britain today.