THEORY OF BANKING
Syllabus
Updated A.Y. 2016-2017
Instructor: Eloisa Campioni
Objective of the course: The course aims at giving students advanced notions and instruments taken from the microeconomic theory to analyse the credit market in its main characteristics and in its fragilities. The course presents the main issues that emerge in financial market interactions affected by asymmetric information, both in competitive economies and in settings in which financial intermediares act as market makers, using the basic tools of contract theory. The aim is to provide students with the necessary instruments to understand the main functioning of borrower-lender interactions and develop a adequate knowledge of the fundamental mechanisms of financial intermediation.
Course program
The course will discuss some fundamental issues related to financial intermediation in contemporary economic systems. Why do financial intermediaries exist? What is the role they play and what are the consequences of their activities?
Preliminaries: What is a bank and what are her functions: a close look at the balance sheet of bank.
Part I
Introduction to time, uncertainty and liquidity. Asymmetric information problems: adverse selection and moral hazard
Microeconomic foundations for financial intermediation. Why do banks exist. Banks in Arrow-Debreu economies. Banks as pool of funds: Diamond-Dybvig (1983). Banks as delegated monitors: Diamond (1984).
Bank runs as outcomes of a self-fullfilling prophecy. Remedies to economic instability due to bank runs. The economic cycle and its effect on bank runs.
The effects of banks on financial markets: equilibria with credit rationing. Stiglitz-Weiss (1981). The role of collateral as an incentive device.
Part II
Banks can fail: history and institutions. A discussion on the emergence of a financial crisis: the causes, the consequences and policy issues related to a crisis. The trasmission mechanisms from the financial to the real sector: money view and credit view. The main features of the 2007-2009 financial crisis in comparison with past crises’ episodes: the causes, the transmission mechanisms, the consequences. Financial market regulation before and after the crisis of 2007-2009.
Teaching Method: frontal lectures, problem sets assigned on a regular basis, students' presentations in class, practical classes.
Main References
Freixas X. and J.- C. Rochet, Microeconomics of Banking, 1st Edition, MIT Press 1998
Allen F. and D. Gale, Understanding Financial Crises, Oxford University Press 2007
Salaniè B., The Economics of Contracts. A Primer, MIT press.
Tirole J., The Theory of Corporate Finance, Princeton University Press 2006
Supplementary readings
Diamond - Dybvig, "Bank runs, deposit insurance and liquidity", JPE 2003
Diamond, "Financial intermediation and delegated monitoring", RES 1984
Diamond, "Financial intermediation as delegated monitoring: a simple example", 1996
Bester, "Screening vs rationing in credit markets with imperfect information", AER 1985
Stiglitz - Weiss, "Credit rationing in markets with imperfect information " , AER 1981
Bernanke, "Non-monetary effects of the financial crisis in propagation of the Great Depression", AER 1983
Caprio - Klingebiel, "Episodes of systemic and borderline financial crises", World Bank document, 2003 (available on World Bank website)
Reinhart - Rogoff, "From financial crash to debt crises", AER 2011
Cecioni - Ferrero - Secchi, "Unconventional monetary policy in theory and in practice", Questioni di Economia e Finanza (Occasional Papers) Bank of Italy, n.102, 2011
Exam
The final grade for this exam is given by the weighted averaged of the grade obtained in the class presentations (50%) and that obtained in the final exam (50%).
The final exam is a written exam, which lasts about 1h30 min.
The exam can be taken at most once in every academic session.
Details avalable on the page: Regolamento esame