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Centre for Financial and Management Studies (CeFiMS)

Banking & Capital Markets

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This course examines the underlying principles and characteristics of banking and financial markets that are the foundation for understanding both their normal role in economies and the headline events. It concentrates on the theoretical and empirical scientific knowledge produced by modern research on banking. Since such knowledge is never fully established or 'proven', it enables the student to examine opposing points of view and to discuss the published studies.


Study Guide

You will receive a looseleaf binder containing eight 'course units'. The units are carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the further assigned readings. The unit files are also available to download from the Online Study Centre.


Franklin Allen and Douglas Gale, (2000) Comparing Financial Systems, The MIT Press Ltd


You will receive three volumes of Readings, which are a compilation of recently published articles or seminal writings which augment and illustrate the main text.

Online Study Centre

You will have access to the OSC, which is a web-accessed learning environment. Via the OSC, you can communicate with your assigned academic tutor, administrators and other students on the course using discussion forums. The OSC also provides access to the course Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Objectives and learning outcomes of the course

The intended learning outcomes of this course emerge naturally from the three themes we discussed above. When you have completed your study of this course, you will be able to:

  • demonstrate a well-founded understanding of what financial markets and financial intermediaries are and how they work
  • explain the factors that contribute to financial instability, the causes and effects of financial crises, and the strategies that can be used to reduce the risk of their occurrence
  • outline and discuss some of the most central concepts and techniques used in the analysis of financial institutions, and
  • apply and refine these methods in your own analyses of phenomena which you encounter in financial markets.

Scope and syllabus

Course Content
Unit 1: Bank-Based vs Market-Based Financial Systems
  • 1.1 Introduction
  • 1.2 Financial Intermediaries, Financial Markets and Flow of Funds
  • 1.3 The Financial System
  • 1.4 Comparing Financial Systems
  • 1.5 Conclusion
Unit 2: Why do Banks Exist?
  • 2.1 Introduction
  • 2.2 Market-Based vs Intermediary-Based Mechanisms
  • 2.3 The Principles of Financial Intermediation
  • 2.4 Transaction Costs
  • 2.5 Banks as Liquidity Insurers
  • 2.6 Conclusion
Unit 3: Why Banks Exist: Explanations Based on their Lending
  • 3.1 Introduction
  • 3.2 Delegated Monitoring
  • 3.3 Information Sharing Coalitions (Leland and Pyle, 1977)
  • 3.4 Conclusions
Unit 4: Banks vs Capital Markets
  • 4.1 Introduction
  • 4.2 Dimensions of Comparison
  • 4.3 A Unified Model for Comparison
  • 4.4 Conclusion
Unit 5: Credit Rationing and Overlending
  • 5.1 Introduction
  • 5.2 The Failure of Equilibrium Mechanisms and Financial Repression
  • 5.3 The Stiglitz and Weiss Model and the Assumption of Asymmetric Information
  • 5.4 Credit Rationing or Over-Lending?
  • 5.5 Conclusion
Unit 6: Bank Runs and Regulatory Responses
  • 6.1 Introduction
  • 6.2 A Model of Bank Runs
  • 6.3 Contagion and Systemic Risk
  • 6.4 Regulatory Responses
  • 6.5 Conclusion
Unit 7 Financial Crisis
  • 7.1 Introduction
  • 7.2 Self-Fulfilling Financial Crises
  • 7.3 Risk Shifting, Bubbles and Crises
  • 7.4 Guarantees, Moral Hazard and Banking Crisis
  • 7.5 Conclusion
Unit 8: Portfolio Analysis
  • 8.1 Introduction
  • 8.2 Risk Management
  • 8.3 Bank Risk Management
  • 8.4 Liquidity Risk
  • 8.5 Credit Risk
  • 8.6 Conclusion

Method of assessment

You will complete two assignments, which will be marked by your course tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 5, and the second assignment at the end of the course, on the Tuesday after Week 8. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Online Study Centre. You will also sit a three-hour examination on a specified date in October, worth 70% of your total mark. An up-to-date timetable of examinations is published in April of each year.