Bank Regulation and Resolution of Banking Crises

The course has been designed to introduce students to some of the key concepts, principles and practices in modern banking regulation and the resolution of modern banking crises. The literature on these subjects is vast so, in approaching the material, the course will be selective, focusing on a selection of key issues.

Objectives and learning outcomes of the module

On successful completion of this course a student will be able to:

• Understand key objectives of bank regulation
• Describe some of the linkages between regulation and regulatory practice, on the one hand; and banking crises on the other
• Describe in detail how the 2007 banking crisis originated in the United States and United Kingdom, how it developed and how it escalated through the wider financial system
• Understand the main early lessons the crisis has yielded, for strengthening banking and financial sector regulation
• Explain the importance of bank capital adequacy and its relevance to the prudential regulation of banks
• List some of the challenges arising from the original Basel I Capital Accord
• Explain the key elements of the Basel II capital adequacy framework
• Describe the major components of modern bank prudential supervision, using the financial soundness indicator and CAMELS framework
• Distinguish between lender-of-last-resort support for liquidity and supporting the bank through investing new capital
• Discuss the concept of ‘too big to fail’ and the difficulties related to it
• Understand the various approaches to resolving failed banks and managing the consequences of their failure
• Highlight the key principles supporting the establishment of a deposit insurance system
• Distinguish between the various approaches used by countries, when structuring their regulatory institutions
• Understand key changes in banking and financial markets, particularly since the mid-1990s, that have increased the prevalence of systemic risk
• Understand the main arguments for and against the establishment of a global financial regulator

Workload

Lectures

This module consists of a 1-hour weekly lecture over 10 weeks of term plus a revision lecture in term 3 as preparation for the final examination. Students will be supplied with a syllabus with a breakdown week by week of required and additional reading. Reading materials are usually accessed electronically from the BLE and students should come to class prepared.

Tutorials

This module also have a weekly 1-hour tutorial where the questions posed by the tutor relevant to the lecture are explored and discussed by the students. Students also prepare and deliver a short presentation.

Total Work load

Students on this module will have 2 taught hours each week.  Additionally, adequate personal study time should be allocated for reading and class preparation.

Scope and syllabus

The main topics addressed in the course will be:

• Detailed analysis of the elements and objective of bank regulation, with particular emphasis on the differences between the regulation of banks and the regulation of non-financial firms;
• the difficulties which arise from the complex structure of modern banks;
• the evolution of coordinated international rules, including Basel I, Basel II and Basel III;
• the relationship between commercial banking and investment banking, and the rise of shadow banking;
• bank supervision, including off-site and forward-looking supervision;
• the changing role of the lender of last resort before and after the 2008 crisis, with particular emphasis on the new methods of emergency liquidity assistance and their implications for the regulation of banks;
• issues associated with the insolvency of banks and implicit regulations;
• the main approaches to institutional structure for financial regulation;
• recent trends in regulatory structure and the role of Central Banks;
• the Fully Unified Approach to financial regulation;
• offshore financial centres;
• regulation, international institutions, standards and codes;
• proposals for international regulatory agencies;
• a World Financial Authority.

Method of assessment

Assessment for this module is in three elements:

1. One tutorial presentation at 10%
2. One essay of 2,500 words at 30%
3. One unseen 2-hour written examination at 60%

All elements except the presentation may be resubmitted.

Disclaimer

Important notice regarding changes to programmes and modules