|
Meeting |
Topics, readings, and assignments |
|
1 |
Raison d'être of financial
intermediaries § information asymmetry - adverse selection and moral hazard § maturity, liquidity and risk transformation § screening and monitoring Note
on the Banking Industry – short overview of the U.S. banking industry Recommended readings: The Future of finance and the theory that
underpins it. London
School of Economics, 2010. Chapter 1 – What do banks do? Chapter 1 is written by Adair
Turner, the former chairman of the FSA (Financial Services Authority), U.K.’s
bank regulator before 2012 Akerlof, George A., “The
Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,”
Quarterly Journal of Economics,
August 1970, 488-500. Classical work on the economics
of asymmetric information for which Akerlof
received a Nobel prize in economics in 2001. |
|
2 |
U.S. Banking Industry § historical review of U.S. banking industry § deposit insurance: arguments for and against §
functions
of a central bank § monetary policy and interest rates Additional notes on
central banks (from F. Mishkin) Case 1: The U.S. Banking Panic of
1933 and Federal Deposit Insurance Assignment: submit your group’s write up where you
address the following questions: 1. Why do bank panics recur? 2. Should Roosevelt agree to bank insurance?
Are there any alternative reforms of the banking system which are preferable
from an economic point of view? From a political point of view? 3. Why does Glass want to separate commercial
and investment banking? Are his arguments compelling? Are there any
other reasons to do that (the separation)? 4. Comment on relevance of 1933 solutions to
recent events (2007-2009). Recommended readings: ·
Money
in the modern economy: an introduction. By Michael McLeay, Amar Radian
and Ryland Thomas. BoE Quarterly Bulletin, 2014 Q1 ·
Money
creation in the modern economy. By Michael McLeay, Amar Radian and Ryland
Thomas. BoE Quarterly Bulletin, 2014
Q1 Additional readings: The Federal Reserve System: Purposes and
functions (chapters 1-3 are the most relevant, read other chapters if you are
interested in the operational aspects of the FED) http://www.federalreserve.gov/pf/pf.htm Bernanke, Ben, S. “Nonmonetary Effects of the Financial
Crisis in the Propagation of the Great Depression,” The American
Economic Review. June 1983, 237-276. The former chairman of the U.S.
Federal Reserve is an expert on the Great Depression. The article provides his insights on the
topic, which many argue were important in implementing the actual FED
policies during the 2007-2009 crisis and still shape
the actions of the central bank. |
|
3 |
Measuring financial performance of
financial intermediaries § balance
sheet § income
statement § ROE
decomposition § key performance ratios (net interest margin, efficiency, etc.) § capital
requirements Recommended readings: ·
Economics
of Retail Banking Note, HBS, #9-602-153, Rev. March 24, 2006 ·
Bank
funding costs: what are they, what determines them and why do they
matter? Bank of England, Quarterly Bulletin, Q3, 2014 Additional resources: ·
JPMorgan
Chase 2014 Annual Report (link to
annual reports - read Chairman’s letter to shareholders) ·
Fifth
Third Bank annual/quarterly reports and SEC filings Recommended readings/links: ·
The Future
of Finance: The
rise of the new Shadow Bank, Part 1, Goldman Sachs, March 13, 2015 ·
The Future
of Finance: The
Socialization of Finance, Part 3, Goldman Sachs, March 13, 2015 ·
U.S. banks reporting from FDIC
(combined income, balance sheet, etc.) ·
Investment
banking scorecard (regional and global equity and debt issued, fees,
etc.) |
|
4 |
Bank lending to businesses and consumers § credit
analysis § lending
policies § pricing
of traditional bank products § estimating
expected credit losses Lecture Notes 4:
lending policies and procedures Additional slides
on business lending Case
2: Santa
Fe Trading Company Assignment: ·
Submit group
case write up where you address all questions listed at the end of the case; ·
Submit
Excel spreadsheet Traditional loan pricing
example (Excel) Required
reading (coursepack): ·
HBS #9-209-107:
An Introduction to Consumer Credit. February 20, 2009. ·
HBS
#9-291-026 Note on Bank Loans, Rev. October 29, 1993 Recommended readings: ·
Highly recommended reading for the case
(Santa Fe): Rose, Peter S. and Hudgins
Sylvia C., Bank Management & Financial Services. McGraw Hill, 7th
Edition, 2008. Chapter 16 –
lending policies and procedures ·
A Brief
Postwar History of US Consumer Finance, HBS Working Paper 11-058 |
|
5 |
Innovations in lending and alternative
finance § Marketplaces:
Zopa, Lending Club, Prosper, § Alternative
lenders: Kabbage, OnDeck; §
Economics of alternative lenders Lecture
5 Notes (overview of intermediation risks) Case 3: Zopa.com - From a hot idea to an established market player? Assignment: submit your group’s write up where you address the following
questions: 1.
What is Zopa’s value proposition?
How does it differ to traditional retail banks? 2.
How
sustainable is Zope’s competitive advantage? 3.
What
strategic options for traditional retail bank such as RBS in responding to Zopa? Which of
these options should the established banks pursue? Why? 4.
Would you
invest in Zopa (as a lender or an investor in the
company itself)? Why or why not? 5.
Lending
Club (LC) is a marketplace in the U.S., which is similar to Zopa. Using LC’s
SEC filings, earning reports, and other resources estimate company’s
addressable market and potential revenue/net income. Do you agree with equity analyst estimates
of LC stock price? Provide your
reasoning. Additional resources: ·
Lending
Club SEC
filings ·
Equity
analyst reports – initial,
Q2 results ·
Federal
Reserve Bank of New York, Consumer Credit
Panel ·
The
Hourglass Effect, A Decade of Displacement, Frank Rotman,
QED investors ·
LendIt USA
2015 Conference, Signature
Keynote: Laurence H. Summers (video) Suggested reading/links: ·
Understanding
Alternative Finance. The UK Alternative Finance Industry Report
2014. University of Cambridge. ·
Financial Times series on P2P (peer-to-peer)
lending – articles on alternative lending universe ·
Lend Academy: website dedicated to peer-to-peer
lending; check out podcasts (in particular #42 - an interview with Kathryn Petralia, co-founder of Kabbage)
– you can listen the podcasts or read the transcripts ·
Special report: International
banking, The Economist, May 9,
2015 |
|
6 |
Payment function: from the bill of exchange
to Visa/MasterCard to Bitcoin §
history:
medieval fairs and bills of exchange, metallic money, gold standard § economics of modern payment systems: checks
in the U.S.; economics of credit cards, merchant services; § bitcoin § economics
of challengers - estimating market potential and expected financial
performance Lecture 6 notes
(payments) Recommended readings: ·
HBS: Consumer Payment Systems –
United States. #9-909-006, Rev. July 20, 2011 ·
Innovations
in payment technologies and the emergence of digital currencies. By Robleh
Ali, John Barrdear, Roger Clews and James Southgate ·
The economics of digital
currencies. By Robleh
Ali, John Barrdear, Roger Clews and James Southgate Additional reading: ·
Cash
Continues to Play a Key Role in Consumer Spending: Evidence from the
Diary of Consumer Payment Choice, Federal Reserve Bank of San Francisco,
April 29, 2014 ·
The
2013 Federal Reserve Payments Study, Federal Reserve System, December 19,
2013; Exhibits
from the Study ·
Strategies
for Improving the U.S. Payment System, Federal Reserve System, January
26, 2015 ·
A
Billion Here, a Billion There: The Statistics of Payments. SWIFT, April
2009. ·
Getting Rid of Paper: Savings from Check 21, Federal Reserve Bank of
Philadelphia, Working Paper No. 12-12, May 2012 |
|
7 |
Investments and money
management §
history of financial instruments and
stock exchanges (New York, London,) §
money management: mutual funds,
retirement funds; §
rating agencies §
innovations in money management business
(‘robo advisors,’ etc.) §
speed trading: economics, efficiency
and fairness; Lecture 7 Notes –
mutual funds Case 4: Betting on Failure: Profiting from Defaults on Subprime
Mortgages (Case KEL880) Assignment: submit your group’s write up where you address the following
questions: 1.
Replicate
the table in Exhibit 5 under the following alternative assumptions a.
Principal
received is $10/month. Principal
reductions remain as specified. b.
Principal
received remains $5/month, but writedowns associated with earlier defaults
are 20/month beginning in six months. 2.
Suppose
that immediately after the bonds were issued, $290,000,000 of principal was
repaid on the underlying mortgages.
How would Exhibit 10 be affected? 3.
Anthony Keating
picked an MBS that he expected would contain a high rate of mortgage
default. Based on the data in the
case, does his choice seem reasonable? 4.
Suppose
the principal writedowns on the underlying mortgage pool continue at the same
rate as those observed in September 2008.
How long will it be until tranche B is completely wiped out? (hint:
review Exhibit 13) 5.
The case
documents that 41% of the outstanding loan pool has been delinquent for 90 or
more days. Assuming that the borrowers behind these mortgages never pay and
the lender ultimately forecloses on the properties, estimate the principal
writedowns that the pool will eventually experience, assuming a recovery rate
of 70%. What will be the effect on
tranche B? Tranche M2? 6.
[advanced
and optional] Use the prices in Exhibit 14. Assume that the defaults/losses described
in Question 5 will occur in exactly twelve months, with no other defaults in
the pool. The other 59% of the loan pool will prepay in full, also in twelve
months. Assume, too, the mortgage
bonds receive interest monthly at the rate given in Exhibit 10 and that
scheduled and additional unscheduled principal payments remain at the
September 2008 level. What is the
internal rate of return (IRR) to an investor who buys Bond M2? Bond M6? 7.
Given the
information in the case, what investment strategies are available to you to
make money when homeowners with mortgages in this particular deal
default? Which of these strategies
seems most appealing? Required
reading: ·
(Coursepack) Introduction to Credit
Default Swaps, 2010. Additional reading: ·
High
Frequency trading and dark pools: An interview with John Succo.
Business Horizons (2013) 56,
715-722. ·
Investment
Company Institute (see the latest annual report
for comprehensive industry data) |
|
8 |
Investment banks, money market mutual funds, and the shadow
banking system §
securitization §
credit default
swaps and other innovations in financial products §
innovation
in finance vs. systemic risk (AIG story) §
TARP Lecture
8 Notes – investment banks Case 5: The
Tip of the Iceberg: JP Morgan Chase and Bear Stearns (A), 2009 Assignment: submit power point, (optional) Excel file
and the write up where you address the following questions: 1. What activities did Bear Stearns undertake?
Was it a commercial bank or an investment bank? 2. SEC Chairman Christopher Cox noted that
Bear Stearns was an adequately capitalized institution as of March 10, 2008.
Do you agree with his assessment? Are well-capitalized financial institutions
invulnerable to crisis? 3. What is a “fortress balance sheet”?
Evaluate the mechanisms used to manage JPMC, and how they enhanced or impeded
their position as the bank best positioned to buy Bear. 4. From a commercial perspective, what are the
pros and cons for JPMC of buying Bear? 5. What responsibility does Dimon have to the financial “system”? Additional reading: ·
Timeline of financial crisis 2007-2010 from New York Fed ·
Levine,
Ross. An Autopsy of the U.S. Financial System. NBER
Working Paper 15956, April, 2010 ·
Gorton, Gary
B. The Subprime Panic. NBER Working Paper 14398, October 2008. ·
Gorton, Gary B.
Questions and Answers about the Financial Crisis, February 2010. Prepared for the U.S. Financial Crisis
Inquiry Commission. |