Provisional. Subject to changes. Masters Programs Course Syllabus 2206 BANKING

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1 1 st Semester BANKING INSTRUCTOR: Paulo Soares de Pinho CONTACT: SHORT BIO: Lic. Economia (UNL); MBA (UNL); PhD Banking and Finance (Cass Business School). Associate Professor and Pro Rector (UNL); Visiting Professor at Cass Business School (London) and Univ of Luxembourg. Former Director of the MBA Programme (UNL). Member of the Board of Directors of Sonae Capital, Change Partners, Soc Capital de Risco and Biotecnol, SA; Senior Advisor at The CBM Banking Consulting Group (USA) and Venture Valuation (Zurich); President of the General Council of Fundo de Sindicação de Capital de Risco. Previously was Executive Director and Board Member at REN Redes Energéticas Nacionais, and worked as consultant to several financial institutions. OFFICE HOURS: [weekdays, room, times] GRADER: [tbc] CONTACT: [tbc] 1. COURSE DESCRIPTION AND CONTENT This course is devoted to the management and regulation of banking firms. It aims to help students to understand the main strategic issues in retail banking and the risks and regulations faced by the industry. Particular emphasis are made on customer focused banking, integrated risk management, interest rate risk, market risk, capital allocation, value based measurement, credit risk and its pricing. Target audience: participants with a strong interest in banking, financial risk management and business consultancy.

2 2. LEARNING GOALS A. Knowledge and Understanding: Why banks are different Understanding banking risks and their regulation Understanding bank financial statements Bank value and its determinants Banking strategies and organisation Banking conglomerates and conglomeration risks Value creation and destruction in banking Risk and return in banking markets and activities Integrated risk management within financial institutions Risk measurement and management The use of derivatives for hedging and leveraging of banking risks Bank capital requirements (economic and regulatory) and management Credit risk evaluation and pricing Bank restructurings B. Subject Specific Skills: Analysis of banking companies and markets Analysis and evaluation of banking risks Measuring and managing interest rate risk Market risk measurement Performance analysis of banking activities using a risk return framework Analysis of customer relationships Credit risk evaluation and analysis Pricing credit risk C. General Skills: Case situation analysis Report preparation and presentation 3. COURSE STRUCTURE Class #1 Overview of commercial banking 1.1 A strategic overview of the retail banking industry 1.2 Relational banking and customer relationship management strategies Readings: lecture notes, SC chpts 1, 2, 7; Bessis chpt 2. Class #2 Financial stability, banking regulation and supervision 2.1Banking: Functions, Risks, Regulation and Supervision

3 Case study: Investment Banking in 2008 (A): the rise and fall of the Bear, Kellog KEL 378. Readings: lecture notes, SC chpts 2, 7, 19. Class #3 The economics of the banking firm; Bank Mergers 3.1 The balance sheet and income statement of the banking firm 3.2 Key performance indicators: profitability and risk 3.3 Valuation of the banking firm 3.4 Bank Mergers Case study: Comerica Incorporated: The Valuation Dilemma; Ivey (UV1410) Readings: lecture notes, SC chpt2 Appendixes 2A and 2B. Class #4 Banking conglomeration, mergers and acquisitions 4.1 Bank Mergers and Acquisitions (contd) Case study: The Royal Bank of Scotland: Masters of Integration, Harvard ( ) 4.2 The architecture of the banking firm Case study: The Credit Suisse Group (Harvard, ) Readings: lecture notes, SC chpt 2, Appendix 2D and chpt 21. Class #5 Asset and liability management 5.1 Introduction to Asset and liability management (ALM) 5.2 Liquidity risk 5.3 Interest Rate Risk: repricing gaps and duration gap models Readings: lecture notes, SC chpts 8, 9, 17 and 18; Bessis, chp 22, 23, 27; Resti and Sironi chpts 1 3. Class #6 Asset and liability management (contd) 6.1 Operational Risk 6.2 Market Risks Introduction to value at risk (VaR) 6.3 Interest rate instruments: FRA s and interest rate swaps (IRS) Case study: Banc One: Asset and Liability Management (Harvard ) Readings: lecture notes, SC chpts 10, 16, 22 and 24. Bessis chpt 17; Resti and Sironi chpts 5 9 and 17. Class #7 Bank capital requirements 7.1 Economic capital measurement 7.2 Capital regulations: Basel I, II and III and EU Capital Adequacy Directives 7.3 Stress Tests Readings: lecture notes, SC chpts 20, 25 and 26; Bessis chpts 19 20, 52 55; Resti and Sironi chpts 4, 12, 15.3,18, 20, 21, 23.

4 Class #8 Bank Capital and Value Based Management 8.1 Value based management and risk based performance: pool of funds and RAROC 8.2 The strategic impacts of new capital regulations Case study: Deutsche Bank and the Road to Basel III, Darden (UVA F 1695) Readings: Bessis chpt 53 54;Resti and Sironi chpt 22. Class #9 Credit risk 9.1 Credit risk: principles 9.2 The options approach to credit risk 9.3 Adverse selection, credit rationing and credit risk evaluation 9.4 Evaluating commercial banking credit risk Readings: lecture notes, SC chpts 11 and 13; Bessis chpts 39 46; Resti and Sironi chpts 10, 11, 13. Class #10 Credit risk (contd) 10.1 Pricing retail credit risk: binomial approach 10.2 Credit risk policy Case study: Risk Management at Wellfleet Bank: All that Glisters is not Gold, Harvard ( ) Readings: lecture notes; Resti and Sironi Class #11 Capital management 11.1 Corporate Governance in Banking 11.2 Securitisation Case study: CDO Creative balance Sheet Management: Value Creation?, IMD (1 0261) Class #12 Managing under distress 12.1 ALM under distressed financial markets Case study: Banco Espírito Santo: Asset and Liability Management During the Financial Crisis (NOVASBE) 12.2 Innovative capital instruments Case study: HighWire Act: Credit Suisse and Contingent Capital, Harvard ( ) 4. TEACHING AND LEARNING METHODS This course uses a combination of formal lectures and case study discussions. All students enrolled will form groups of 5 members. All groups are required to submit 3 written case reports, three on each half semester. Graders will allocate groups to cases in order to guarantee a sufficient number of written reports for each case. Students

5 should be ready to share their analyses in class presentations and to actively participate in all class discussions, regardless of having been allocated (or not) a particular case for written report. All case studies identified on the syllabus will be used for assignment (although each group is limited to three written reports) and will be discussed in class. All students are assumed to have read and analysed all case studies and to be ready to publicly present their conclusions and answer any questions posed by the instructor on them. Sometimes, cases will be used as a basis for role playing by different groups of students of real life simulated events. More than one group may be involved in class presentations. When cases are assigned to groups, one of the student groups who prepared the written reports will be asked to present to the class their own recommendations. Oral case presentations have a 30 minute time limit. Once the initial presentation is over, other students will be asked to comment on the previous presentation (15 minute time limit). Such comments should emphasize each group s conclusions and supporting arguments. The discussion is open to all students in the class. Then, the instructor will highlight the main conclusions and the key learning benefits achieved with the case analysis and discussion. Written reports are expected to have the quality of presentations by consultants or investment bankers to the Board of Directors of the Company. These reports should specifically address the issues raised by the instructor via a previously posted set of questions. All reports should start with a first page "executive summary" that identifies main issues and summarises fundamental recommendations. Then, the report should address the issues raised by the instructor. There is a rather free format for the reports, and emphasis should be placed on the originality of the analysis provided and the overall professional quality of the presentation. Mere repetition of case information is strongly penalised. Focus on the key issues is preferred against lengthy presentations of useless facts and data. The latter will also be severely penalised. 5. ASSESSMENT Group solution of the case studies (35%): Each group will make presentations on three of the case studies listed above Final Exam: 45% Class participation: 20% Minimum exam grade: 9.5

6 6. BIBLIOGRAPHY AND OTHER RESOURCES Main textbook: Saunders and Cornett (SC) Financial Institutions Management: a risk management approach, 7 th ed, McGraw Hill, A practical texbook covering important material on the course is: Choudhry, Moorad An Introduction to Banking: Liquidity Risk and Asset Liability Management, Wiley, Some useful more advanced books are: Bessis, Joel Risk Management in Banking, 3 nd ed, Wiley (2010). Resti, Andrea and Sironi, Andrea Risk Management and Shareholders Value in Banking, Wiley, 2007