Banking and Capital Markets

It is widely recognised by academic economists and policymakers that developed and efficient banking and capital markets are an important prerequisite for economic growth. However, it is also recognised that banking and financial crises can cause abrupt slowdowns or reversals of growth. The drive to understand these phenomena has generated a large body of research, leading to new theories and empirical studies of key features of banking and capital markets. This literature provides the underpinning for the subject material of this module.

Learning outcomes

When you have completed your study of this module, you will be able to:

• explain the functions of financial intermediaries, and evaluate the strengths and weaknesses of bank-oriented and market-oriented financial systems.
• critically evaluate theories of the banking firm which focus on the role of the bank as a provider of liquidity insurance for depositors, and as a delegated monitor of borrowers.
• explain the methods available to a bank to manage credit risk, interest rate risk, market risk and liquidity risk.
• explain why credit markets may fail to clear, and critically evaluate theories of credit rationing and overlending.
• discuss the methods used by shadow banking institutions to raise finance, and the risks to financial stability presented by shadow banking.
• critically evaluate methods for measuring the efficiency of banks, and the intensity of competition in deposits and loans markets.
• explain how a loss of depositor confidence, and asset price bubbles, can trigger banking and financial crises.
• critically evaluate the effectiveness of regulatory arrangements for the banking industry in promoting financial stability.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is 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 assigned readings.
• Key texts: Matthews K and J Thompson (2014) The Economics of Banking. 3rd Edition. Chichester UK: John Wiley & Sons.
  Freixas X and J-C Rochet (2008) Microeconomics of Banking. 2nd Edition. Cambridge MA: The MIT Press.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Banks and Financial Markets

• 1.1 Introduction
• 1.2 Financial Intermediaries, Financial Markets, and the Flow of Funds
• 1.3 The Financial System and the Flow of Funds
• 1.4 Comparative Financial Systems
• 1.5 Law, Politics and Financial Systems
• 1.6 Bank-oriented versus Market-oriented Financial Systems
• 1.7 Conclusion

Unit 2 Financial Intermediation

• 2.1 Introduction
• 2.2 Principles of Financial Intermediation
• 2.3 Financial Intermediation and Transaction Costs
• 2.4 The Financial Intermediary as a Means of Alleviating Asymmetric Information Problems
• 2.5 The Financial Intermediary as a Liquidity Insurer for Depositors
• 2.6 Conclusion

Unit 3 Risk Management

• 3.1 Introduction
• 3.2 Interest Rate Risk
• 3.3 Market Risk
• 3.4 Credit Risk
• 3.5 Liquidity Risk
• 3.6 Conclusion

Unit 4 Credit Rationing

• 4.1 Introduction
• 4.2 Financial Repression
• 4.3 Credit Rationing due to Adverse Selection: The Stiglitz–Weiss Model
• 4.4 Over-lending
• 4.5 Credit Rationing due to Moral Hazard
• 4.6 Conclusion

Unit 5 Shadow Banking and Securitisation

• 5.1 Introduction
• 5.2 Shadow Banking: Entity-based Classification
• 5.3 Shadow Banking: Activity-based Classification
• 5.4 Traditional Banking and Shadow Banking
• 5.5 The Role of Shadow Banking in the Global Financial Crisis 2007–09
• 5.6 Regulation of Shadow Banking
• 5.7 Conclusion

Unit 6 Competition and Efficiency in Banking Markets

• 6.1 Introduction
• 6.2 The Theory of the Banking Firm
• 6.3 Measures of Competition in Banking
• 6.4 The Structure-Conduct-Performance Paradigm
• 6.5 The New Empirical Industrial Organisation
• 6.6 Measures of Banking Efficiency
• 6.7 Mergers and Acquisitions in Banking
• 6.8 Conclusion

Unit 7 Banking and Financial Crises

• 7.1 Introduction
• 7.2 Bank Runs in the Diamond and Dybvig Model
• 7.3 The Asian Financial Crisis 1997–98
• 7.4 Risk-shifting and Asset Price Bubbles
• 7.5 The Global Financial Crisis 2007–09
• 7.6 Deposit Insurance and Moral Hazard
• 7.7 Conclusion

Unit 8 Bank Regulation

• 8.1 Introduction
• 8.2 Systemic Risk
• 8.3 Lender of Last Resort
• 8.4 Deposit Insurance
• 8.5 Risk-adjusted Capital Adequacy Requirements
• 8.6 Stress Testing
• 8.7 Conclusion

Module samples

• M426 Module introduction (PDF)
• M426 Specimen examination (PDF)
• M426 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules