Banking Summer School

Course Overview

The main objective of this course is to understand the key mechanisms underlying the behavior of banks and their consequences. The course present different setups that allow the participant to better understand:

1. The relevance of imperfect information in the credit market
2. The role of financial institutions in the economy
3. The specifics of banks' strategies and their impact on the overall allocation of capital in the economy
4. The role of banks and other agents in determining the inherent instability of the economy
5. The logic and possible unintended consequences underlying banking regulation

Course Outline

1. Why do financial intermediaries exist?
   • Information frictions in the credit market
   • The Stiglitz and Weiss setup: Credit rationing
2. The role of Informed Intermediaries
   • The Holmström-Tirole setup
   • Debt Overhang Problems
   • Dark side of deposit Insurance
3. Bank competition and bank risk
   • Traditional Approach
   • Alternative Approach
4. Bank capital regulation
   • Risk Insensitive Capital Regulation
   • Risk Sensitive Capital Regulation
   • Macroeconomic impact of Capital Regulation
5. Bank runs
   • The Diamond-Dybvig setup
   • How to prevent deposit-based bank runs: deposit insurance
   • Double bank runs

List of References

While no reference is mandatory the following list might be useful:

Books

• Allen, F., and D. Gale. 2000. Comparing Financial Systems. Cambridge, MA: MIT Press 
• Freixas, X., and J.C. Rochet. 1997. Microeconomics of Banking. Cambridge, MA: MIT Press 

Articles

• Boyd, J., and G. De Nicolo. 2005. The Theory of Bank Risk-Taking and Competition Revisited. Journal of Finance 60:1329–43. 
• Diamond, D.., and Philip H. Dybvig. 1983. “Bank Runs, Deposit Insurance, and Liquidity.” Journal of Political Economy 91 (5): 401–19
• Holmström, B., and J. Tirole (1997), “Financial Intermediation, Loanable Funds, and the Real Sector,” Quarterly Journal of Economics 
• Stiglitz, J. E., and A.Weiss. 1981. Credit Rationing in Markets with Imperfect Information. American Economic Review 71:393–410. 

About the Instructor

David Martinez-Miera is a Ramon y Cajal Associate Professor of Finance in the Business Department at Carlos III University as well as a CEPR Research Affiliate. He also acts as an advisor to different central banks such as the Bank of Canada or the Bank of Spain.

He holds a PhD in Economics from the Centro de Estudios Monetarios y Financieros (CEMFI) and UIMP, an MSc in Economics and Finance from CEMFI and a BSc in Business Administration from the University of La Rioja.

His main research interest focus on the area of financial intermediation with special emphasis on the importance of the banking sector in the build-up of risk in the economy. His research has been published in relevant journals such as Econometrica, Review of Financial Studies, Review of Finance or Annual Review of Economics. He is currently an Associate Editor of Review of Finance, International Review of Finance and SERIES.

Course Overview

The objective of this course is to present empirical applications of relevant questions for both banking theory and policy, mainly related to Systemic Risk, Crises, Macroprudential and Monetary Policy. An important objective is to read and understand scientific papers in empirical banking; to accomplish this objective, emphasis is placed on illustrating research methodologies used in empirical banking and learning the application of these methodologies to selected topics.

Course Outline

1. Credit cycles
2. Securities and credit registers; large datasets
3. Fire sales, market and funding liquidity
4. Bank capital and macroprudential regulation
5. Risk-taking and credit channels of monetary policy
6. Real effects of financial shocks
7. Moral hazard vs. behavioral based risk-taking
8. Secular stagnation, banking and debt crises
9. Interbank contagion, bank runs and systemic risk
10. Banking globalization
11. Capital controls and capital flows to emerging markets
12. Macro vs. micro prudential policy

List of References

Basic Textbook (included in the course fees): Freixas, X., Laeven, L., and Peydró, J.L., Systemic Risk, Crises, and Macroprudential Regulation, Boston, MA: MIT Press, June 2015.

About the Instructor

José-Luis Peydró is ICREA Professor of Economics at UPF, BSE Research Professor, CREI Research Associate and CEPR Research Fellow. His research on Banking and Systemic Risk has been published in the top journals in Economics and Finance such as JFE, RFS, JF, AER and Econometrica. Professor Peydró has presented his research in top universities including Harvard, MIT, Princeton, Stanford, Columbia, NYU, LSE, Oxford and LBS and in policy organizations such as the Federal Reserve Board, New York Fed, IMF, WB, BIS, ECB, Bundesbank, and Bank of England, and has written a book on Systemic Risk, Crises and Macroprudential Policy published by MIT Press. José-Luis is currently a Member of the European Systemic Risk Board in Frankfurt, holds a PhD in Finance from INSEAD and a Master in Economics from CEMFI, and was awarded with the first prize by the Government of Spain for the student with highest GPA in finishing a BA in Economics in Spain in 1998.

Course Overview

This course introduces current methodologies for the analysis of banks’ profitability and risk both at an individual and system level. Starting with the classical empirical analyses of bank profitability and risk of the Industrial Organization literature, the course proceeds to examine recent developments in the measurement of bank performance and risk, as well as banking system stability.

The course reviews the relevant literature, illustrates key features of the economic and statistical models, and provides hands-on examples of empirical applications through workshops run with Stata software. 

At the end of this course, participants will understand classical and recent empirical analyses of banking and will be able to implement selected analyses using bank level datasets.

This course is specifically aimed at advanced undergraduate and graduate students interested in completing their studies on banking and/or developing Master or PhD theses on bank risk, bank risk management, and financial stability.

Course Outline 

1. The Industrial Organization of Banking  
   • Modeling and measuring the impact of bank competition and market structure on bank profitability and risk
2. Taxonomy and measurement of bank risks 
   • Measuring market, credit and liquidity risk. Tail risk measures 
3. Banking system stability 
   • Systemic bank distress and banking crises: measurement and prediction
4. Foundations of Early Warning Systems (EWS) for Bank Systemic Risk 
   • SRISK-type and network frameworks
5. Stress Testing Banking Systems
   • Methodologies and implications for regulation

List of References

Selected papers from the Handbook of Financial Stress Testing, Cambridge University Press, 2022

• Adrian, Tobias and Markus Brunnermeier, 2016, CoVaR, American Economic Review, Vol(106(7): 1705-1741. 
• Benoit, Colliard, Hurlin, and Perignon, 2017, Where the Risks Lie: A Survey on Systemic Risk, Review of Finance, 21: 109-152
• Boyd, De Nicolò, and Rodionova, 2019, Banking crises and crises dating: disentangling shocks and policy responses, Journal of Financial Stability, Vol. 41: 45-54.
• Brownlee and Engle, 2017, SRISK: A Conditional Capital Shortfall Measure of Systemic Risk, Review of Financial Studies, Vol. 30, n.1: 48-79. 
• De Nicolò, Gianni, and Marcella Lucchetta, 2017, Forecasting Tail Risks, Journal of Applied Econometrics, 32: 159-170.
• Degryse, Hans, and Steven Ongena, 2008, Competition and Regulation in the Banking Sector: A Review of the Empirical Evidence on the Sources of Bank Rents, Chapter 15 in Handbook of Financial Intermediation and Banking, Oxford.
• Engle and Ruan, 2019, Measuring the probability of a financial crisis, Proceedings of the National Academy of Sciences, PNAS
• Hughes, Joseph, and Loretta Mester, 2019, The performance of financial institutions: modeling, evidence, and some policy implications, Oxford Handbook of Banking, 3rd Edition, Oxford. 
• Vives, Xavier, 2019, Competition and stability in modern banking: A post-crisis perspective. International Journal of Industrial Organization, 6: 55-69.

About the Instructor

Gianni De Nicolò joined Johns Hopkins University (JHU) Carey Business School in 2018. Before joining JHU, he worked in the International Monetary Fund (Monetary and Capital Markets Department, Research Department, IMF Institute), was Economist in the Division of International Finance at the Board of Governors of the Federal Reserve System, Assistant Professor at the Graduate School of International Economics and Finance of Brandeis University, and Lecturer at the University of Rome I (“La Sapienza”).

Course Overview

The banking system is an essential, but unpredictably fragile, foundation for modern market economies. To prevent the banking system from collapsing, we regulate banks more extensively than any other market sectors.  The recent crisis experience has given rise to a rethinking of the structure of the financial safety net (comprising regulation, supervision, resolution and deposit insurance). The increasingly interconnected nature of banking across borders adds an international challenge. 

The course provides an overview of the relevant issues in bank regulation, focusing on policy-relevant issues and empirical research.  At the end of the course, students should have a clear understanding of the relevant domestic and global issues of bank regulation understand how to assess the impact of bank regulatory reforms and how to draw appropriate policy conclusions from empirical research. 

The course targets researchers, aspiring and experienced policymakers and professionals focused on regulatory and prudential aspects of banking.

Prerequisites

Some primary background readings for this class are listed below. While students may wish to familiarize themselves with these papers before class, a complete and thorough reading of these papers prior to class is not necessary.

Course Outline

1. Why are we regulating banks?
   1. Market frictions in banking
   2. The financial safety net and its component
   3. The trade-off between risk mitigation and moral hazard
2. Capital and liquidity regulation
   1. Empirical evidence
   2. Basel III reforms
3. Bank resolution and deposit insurance
   1. Trade-offs
   2. Empirical evidence
   3. Recent reforms
4. Micro- vs. macro-prudential regulation
   1. Systemic risk and macro-prudential toolbox
   2. Empirical evidence on macro-prudential regulation
5. The future of money: digitalisation and the regulation of payment service providers.

List of References

• Acharya, Viral V., Lasse H. Pedersen, Thomas Philippon, and Matthew Richardson. 2017. Measuring Systemic Risk. Review of Financial Studies.
• Arner, D., R. Auer and J. Frost (2020), “Stablecoins: risks, potential and regulation”, Bank of Spain Financial Stability Review, November.
• Auer, R., G. Cornelli and J. Frost (2020), “Covid-19, cash and the future of payments”, BIS Bulletin No. 3, April. 
• Bank for International Settlements (2020), “Central banks and payments in the digital era”, Annual Economic Report, Ch. III, June. 
• Frost, J. (2020), “The economic forces driving fintech adoption across countries”, BIS working paper no 838, February. 
• Beja, A. and E. Golemi (2020) “How can Central banks secure the future of money?“ Central Banking, November
• Cerutti, Eugenio, Stijn Claessens, and Luc Laeven (2015) The Use and Effectiveness of Macroprudential Policies: New Evidence. IMF Working Paper 15/61.
• Dewatripont, M:, J.C. Rochet and J.Tirole, “Balancing the Banks” Princeton UP
• Freixas, Xavier; Luc Laven and Jose Luis Peydro (2015): Systemic Risk, Crises, and Macroprudential regulation, MIT Press 
• Freixas, Xavier and J.C. Rochet (2021) “Microeconomics of banking” 3rd edition, MIT Press. 
• Jiménez Gabriel, Steven Ongena, José Luis Peydró and Jesús Saurina, 2017. Macroprudential policy, countercyclical bank capital buffers and credit supply: Evidence from the Spanish dynamic provisioning experiments. Journal of Political Economy.
• Rochet, J.C. “Why are there so many banking  crises?” Princeton UP
• Rochet, J.C. and J. Tirole (2003)“Platform Competition in Two-sided Markets“ Journal of the European Economic Association 1(4). Zhang, Y., H. Yue and L. Meihan (2021) “In Depth: the Rectification and remaking of Ant Group“ Caixin April 28th.
• Demirguc-Kunt, A., E. Detragiache and O. Merrouche (2013) Bank Capital: Lessons from the Crisis, Journal of Money, Credit and Banking 45 
• Freixas, X. and J.C. Rochet 2021“Microeconomics of Banking” (3rd edition) MIT Press, 
• Rochet, J.C. “Why are there so many banking Crises?”, Princeton UP. 

About the Instructor

Jean-Charles Rochet is professor of banking at GSEM and senior chair at the Swiss Finance Institute. He is also visiting professor at Zürich University. He holds a PhD in Mathematical Economics from Paris University. He has taught at the Toulouse School of Economics and the London School of Economics, and has visited many universities and central banks all over the world. He was President of the Econometric Society in 2012 and has been a Fellow of this society since 1995. He has published more than 90 articles in international scientific journals and seven books, including Microeconomics of Banking (with X. Freixas) at MIT Press, Balancing the Banks (with M. Dewatripont and J. Tirole) and Why are there so many banking crises?, both at Princeton University Press. His research interests include banking, financial stability, industrial organization of financial markets, and contract theory.