Systemic Risk and Financial Regulation. University of Bonn, Winter 2014/15. Syllabus: Preliminary Version, Due to Be Updated During the Course

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1 Martin Hellwig Max Planck Institute for Research on Collective Goods Bonn Systemic Risk and Financial Regulation University of Bonn, Winter 2014/15 Syllabus: Preliminary Version, Due to Be Updated During the Course The course consists of 14 lectures of 90 minutes each. The lectures cover a mixture of material involving - the mechanisms involved in financial crises and the concept of systemic risk - the economic roles of banks and other financial intermediaries and the causes of financial fragility - an account of US banking regulation and the US banking system in the 20 th century, with asides on banking systems elsewhere - bank capital regulation under Basel - the discussion about regulatory reform since the crisis - current policy issues. Most lectures will not involve much formal apparatus, but for some topics, the formal infrastructure for understanding policy discussion will be explicitly developed. Much of the material is covered in the book A. Admati and M. Hellwig, The Bankers New Clothes: What s Wrong With Banking and What to do about It, Princeton University Press, Princeton, N.J but the discussion in the main text of the book is addressed at a general audience rather than a scholarly discussion. Endnotes do provide the scholarly discussion but are less systematic. Lecture 1: A brief account of the financial crisis of Admati and Hellwig, Chapter 5 Hellwig, M.F., (2009), Systemic Risk in the Financial Sector: An Analysis of the Subprime- Mortgage Financial Crisis, De Economist, 157, pp ( 1

2 Lecture 2: What is systemic risk? Admati and Hellwig, Chapter 5 Hellwig, M.F. (1995), Systemic Aspects of Risk Management in Banking and Finance, Swiss Journal of Economics and Statistics 131 (1995), (available online) Hellwig, M.F., (2009), Systemic Risk in the Financial Sector: An Analysis of the Subprime- Mortgage Financial Crisis, De Economist, 157, pp ( Hellwig, M.F. (2014), Systemic Risk and Macroprudential Policy, mimeo Lecture 3: What Do Banks Do? Delegated Monitoring Admati and Hellwig, Chapter 4 Diamond, D. (1984), Financial Intermediation and Delegated Monitoring, Review of Economic Studies 51, Hellwig, M.F. (1991), Banking, Financial Intermediation and Corporate Finance, in: A. Giovannini and C. Mayer (eds.) European Financial Integration, Cambridge UP, Hellwig, M.F. (1998), Banks, Markets and the Allocation of Risks, Journal of Institutional and Theoretical Economics 154, Lecture 4: What do Banks Do? Liquidity Provision Admati and Hellwig, Chapter 10 Bhattacharya, S., and A.J. Thakor (1993), Contemporary Banking Theory, Journal of Financial Intermediation 3, Calomiris, C., and G. Gorton The Origins of Banking Panics: Models, Facts and Bank Regulation. In Financial Markets and Financial Crises, ed. R. Glenn Hubbard. Chicago: University of Chicago DeAngelo, H., and R. Stulz (2013), Why High Leverage is Optimal for Banks, mimeo Diamond, D., and P. Dybvig (1983), Bank Runs, Deposit Insurance and Liquidity, Journal of Political Economy 91,

3 Hellwig, M. (2015), Liquidity Provision and Equity Funding of Banks, mimeo. Lecture 5: Moral Hazard in Banking Deposit Finance as a Disciplining Device Admati and Hellwig, Chapter 8 Admati, A., P. DeMarzo, M. Hellwig, and P. Pfleiderer (2011), Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive, Section 5, online at Admati and Hellwig, Omitted Chapter (online at Calomiris, C., and C. Kahn (1991), The Role of Demandable Debt in Structuring Optimal Banking Arrangements, American Economics Review 81, Diamond, D., and R. Rajan (2000), A Theory of Bank Capital. Journal of Finance 55, Liquidity Risk, Liquidity Creation and Financial Fragility. Journal of Political Economy 109: Lecture 6: Banking under Glass-Steagall: Financial Stability before, Instability after 1970 Admati and Hellwig, Chapter 4 Baltensperger, E., and J. Dermine (1987), Banking Deregulation in Europe, Economic Policy 4, Deregulation of Banking, European Economic Review 34, Hellwig, M.F. (1995), Systemic Aspects of Risk Management in Banking and Finance, Swiss Journal of Economics and Statistics 131 (1995), (available online) Kane, E. (1985), The Gathering Crisis in Federal Deposit Insurance, MIT Press Lecture 7: The Politics of Banking Admati and Hellwig, Chapter 12 Borges, A., Portuguese Banking in the Single European Market, in: J. Dermine (ed), European Banking in the 1990s, Blackwell, Oxford 1990, Bruni, F., Banking and Financial Regulation: The Italian Case, in: J. Dermine (ed), European Banking in the 1990s, Blackwell, Oxford 1990,

4 Lecture 8: Real Estate Finance and Maturity Transformation as a Source of System Risk Hellwig, M.F., (2009), Systemic Risk in the Financial Sector: An Analysis of the Subprime- Mortgage Financial Crisis, De Economist, 157, pp ( Hellwig, M.F., (1994), Liquidity Provision, Banking and the Allocation of Interest Rate Risk, European Economic Review 38, Lecture 9: Capital Regulation under Basel and the Push for Securitization Admati and Hellwig, Chapter 11 Financial Services Authority (2010), The Prudential Regime for Trading Activities: A Fundamental Review, Discussion Paper 10/4, Financial Services Authority, London (available online). Haldane, A. (2012), The Dog and the Frisbee, Speech Delivered at the Federal Reserve Bank of Kansas City s 366 th economic policy symposium, Jackson Hole Wyoming (available online) Hellwig, M. and M. Staub (eds., 1996), Capital Requirements for Market Risks Based in Inhouse Models Aspects of Quality Assessment, Swiss Journal of Economics and Statistics 132, Lecture 10: Procyclicality: Banking and the Macroeconomy Advisory Scientific Committee of the European Systemic Risk Board, Forbearance, Resolution, and Deposit Insurance, Report 01/2012 ( 82d62606 ) Blum, J. and M. Hellwig (1995), The Macroeconomic Implications of Capital Adequacy Requirements for Banks, European Economic Review 39,

5 Hellwig, M.F. (2012), Systemic Risk and Macroprudential Policy, mimeo Lecture 11: The Case for Substantial Equity Requirements: How Expensive is Equity? Admati and Hellwig, Chapters 2,3, 6 9 Admati, A., P. DeMarzo, M. Hellwig, and P. Pfleiderer (2011), Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive, Section 5, online at Admati, Anat R., Peter M., DeMarzo, Martin F. Hellwig and Paul Pfleiderer (2012), Debt Overhang and Capital Regulation, online at Lecture 12: Are Banks Different? How and Why? Admati and Hellwig, Chapter 7, 10, and omitted chapter Diamond, D., and R. Rajan (2000), A Theory of Bank Capital. Journal of Finance 55, Lecture 13: Regulatory Reform Since the Crisis Admati and Hellwig, Chapters 1, 6, 11, 12, 13 Admati, A. and M. Hellwig (2011), Comments to the UK Independent Commission on Banking ( f ) Basel Committee on Banking Supervision (BCBS), (2011), Basel III: A global regulatory framework for more resilient banks and banking systems, Discussion Paper 189. Basel Committee on Banking Supervision (BCBS), (2011b), Resolution policies and frameworks progress so far, DiscussionPaper

6 Lecture 14: The Role of Banks in the Euro Crisis and the Move towards Banking Union Advisory Scientific Committee of the European Systemic Risk Board, Forbearance, Resolution, and Deposit Insurance, Report 01/2012 ( 82d62606 ) Hellwig, M. (2011), Quo Vadis Euroland? European Monetary Union between Crisis and Reform, in: F. Allen, E. Carletti, G. Corsetti, Life in the Eurozone: With or Without Sovereign Default?, FIC Press, Wharton Financial Institutions Center, Philadelphia 2011, ( Hellwig, M. (2014), Financial Stability, Monetary Policy, Central Banking and Banking Supervision, Preprint 2014/09, Max Planck Institute for Research on Collective Goods. Hellwig, M. (2014), Yes Virginia, There is a European Banking Union, But It May Not Make Your Wishes Come True, Preprint 2014/12, Max Planck Institute for Research on Collective Goods. 6