Lahore University of Management Sciences. FINN 341A - Financial Institutions and Markets Fall Semester 2014

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1 FINN 341A - Financial Institutions and Markets Fall Semester 2014 Instructor Muhammad Basharullah Room No. 315 SDSB Building Office Hours Monday to Thursday Hours TBA bashar@lums.edu.pk Telephone Ext: 8080 and Secretary/TA Anam Amin Lakhani TA Office Hours TBA Course URL (if any) Suraj.lums.edu.pk COURSE BASICS Credit Hours 3 Lecture(s) Nbr of Lec(s) Per Week Twice-weekly Duration 90 Minutes Recitation/Lab (per week) Nbr of Lec(s) Per Week Once/every 2 weeks Duration 90 Minutes Tutorial (per week) Nbr of Lec(s) Per Week Once/every 2 weeks Duration 90 Minutes COURSE DISTRIBUTION Core Elective Open for Student Category Close for Student Category Yes All priority to seniors and juniors. Select sophomore may also apply. Freshman COURSE DESCRIPTION The course is designed to equip students with knowledge of a financial system, its regulatory framework and environments in, and as in other global economies. The course envisages a detailed discussion on Financial Markets. The money markets, capital markets of. The International Stock markets and global bond markets shall be discussed and compared with markets in. The course will also cover Foreign Exchange, Derivatives and commodities markets internationally and in. The course shall cover the Institutional framework within. Various banking and non banking institutions shall be discussed. A comparative analysis of their functions, roles and impact on economic system shall be critically examined. Besides revisiting the existing market oriented financial system and its fault lines, the alternate financial systems or paradigms shall be explored and covered in the course. The course is intended also to identify the regulatory compliance initiatives to ethical and prudential issues. COURSE CONDUCT: Primarily Lecture method based on assigned readings. Class discussions and presentations on assigned topics, various course relevant reports, articles and news on current developments affecting Financial Markets and Institutions Services of outside specialist speakers shall be arranged as well. Course pack shall be made available through photocopier 1

2 COURSE PREREQUISITE(S)/CONDUCT FINN 100 Principles of Finance MECO 111 Principles of Microeconomics MECO 121 Principles of Macroeconomics Lahore University of Management Sciences COURSE LEARNING OUTCOME (CLO) On completion of the course the students shall be able to 1. Understand the various function, activities, issues and roles of different financial markets and examine its nuts and bolts and the fault lines. 2. Understand the nature of different financial instruments, the rationale for structure, profile and the cash flow implications for sound financial decisions. 3. Know the regulatory framework within ; understand the challenges posed by Global Regulatory Architecture shaping up, and its implications for the global financial environments. 4. Critically evaluate the strength and weaknesses of some of the regulations. 5. Identify ethical issues and how they are addressed to improve the overall conduct of financial institutions and markets 6. Demonstrate effective writing and oral communication skills. Students shall working a group environment and shall write and present the report according to the standard report writing and presenting methods. able to apply effective, written and verbal communication skills 7. Manage their group dynamics and team work. 8. Interpret the financial press releases and various financial situation analyses. 9. Engage in financial discourse on financial institutions and markets. They shall be able to critically examine the salient features of financial systems and its institutional framework. 10..Show a holistic understanding of systemic challenges and risks in the global financial environments. UNDERGRADUATE PROGRAM LEARNING GOALS & OBJECTIVES General Learning Goals & Objectives Goal 1 Effective Written and Oral Communication Objective: Students will demonstrate effective writing and oral communication skills. Students shall working a group environment and shall write and present the report according to the standard report writing and presenting methods. The students shall besides group dynamics, learn effective, written and verbal communication. Goal 2 Ethical Understanding and Reasoning Objective: Students will demonstrate that they are able to identify and address ethical issues in an organizational context. Goal 3 Analytical Thinking and Problem Solving Skills Objective: Students will demonstrate that they are able to identify key problems and generate viable solutions. Goal 4 Application of Information Technology Objective: Students will demonstrate that they are able to use current technologies in business and management context. Goal 5 Teamwork in Diverse and Multicultural Environments Objective: Students will demonstrate that they are able to work effectively in diverse environments. Goal 6 Understanding Organizational Ecosystems Objective: Students will demonstrate that they have an understanding of Economic, Political, Regulatory, Legal, Technological, and Social environment of organizations. Major Specific Learning Goals & Objectives Goal 7 (a) Discipline Specific Knowledge and Understanding Objective: Students will demonstrate knowledge of key business disciplines and how they interact including application to real world situations (Including subject knowledge). 2

3 Goal 7 (b) Understanding the science behind the decision-making process (for MGS Majors) Objective: Students will demonstrate ability to analyze a business problem, design and apply appropriate decision-support tools, interpret results and make meaningful recommendations to support the decision-maker Indicate below how the course learning objectives specifically relate to any program learning goals and objectives. Program Learning Goals and Objectives Course Learning Course Assessment Item Objectives Goal 1 Effective Written and Oral Communication CLO # 6 Final Project Report, Article Presentation and Class Participation. Goal 2 Ethical Understanding and Reasoning CLO # 3,4,5 Class Participations, Quizzes and Final Examination. Goal 3 Analytical Thinking and Problem Solving Skills CLO # 1,2,3,4,5,6 Final Project Report, Article Presentations and class participation Goal 4 Application of Information Technology CLO # 6,7 Final Project Report and Article Presentation Goal 5 Teamwork in Diverse and Multicultural Environments CLO # 6,7 Final Project Report and Article Presentation Goal 6 Understanding Organizational Ecosystems CLO # 1,2,3,4,5,,8,9,10 Final Exam, Quizzes and Class Participation Goal 7 (a) Program Specific Knowledge and Understanding CLO # 5,6,7,8,9,10 Final Examinations, Quizzes, Final Project Report and Article Presentations, Goal 7 (b) Understanding the science behind the decision-making process N/A N/A GRADING BREAKUP AND POLICY POLICY REGARDING EXAMINAIONS QUIZZES AND OTHER GRADING INSTRUMENTS. There is a zero tolerance policy (ZTP) for any undesirable behavior or undeserving attempt to improve grades during the quizzes and examinations. Such action can result in cancellation of examination paper. It may also result in disciplinary actions by Disciplinary Committee. Students are strongly advised to please carefully weigh in their action s costs and benefits. All students are also advised to show an ethical and moral deportment and behavior at all times. Attendance and Class Participation 20 % Each absence in sessions from (From 5 th -25 th ) shall loose 1 marks for each day of absence. Failing to actively participate intelligently shall cost 7 marks. (To get full 20 marks, a student shall at least attend 20 (From 5 th -25 th ) sessions and participate in at least 7). th Missing final presentation sessions shall cost 2 marks per session, from marks earned till 25 sessions. An overall absence of 10 minutes or more, in a session shall be deemed as an absence for the full session. Policy regarding class participation The course is intended to be highly interactive. All the students are expected to participate in the class discussions. In order to ensure a positive learning climate, only intelligent and contributory observation and discussions shall be rewarded All ethical norms shall be observed in the class and examinations. Any attempt to disturb a classmate, engage in talking or whispering during the class or to vitiate the overall class atmosphere may result in negative marks in class participation. Turn Off your Cell phones or put them on Silent mode. Use of Smartphone, internet, on line chatting or use of technology related gadgetry of any kind is not allowed to be used for any other purpose except to seek current financial information with the permission of the instructor. 3

4 Quizzes 20 % There shall be total of 5 quizzes from the assigned and the last reading, Best 4 will be counted. No Makeup quizzes shall be allowed whatsoever. repeat whatsoever Article Presentation 10% An article presentation by smaller groups on any current subject matter related articles. These articles to be selected from current press, i.e. magazine, newspaper or internet. It may be on topics of domestic or international relevance. The article would be approved by the instructor from a choice of at least three. The group shall be required to critically examine the author s point of view and present their own. A Report & Presentation 20 % (A group project) Group size of 4-5 persons, depending on class size) A report on comprehensive and critical analysis of a selected institution or a topic shall be prepared and presented by each group. The groups shall be finalized in the 5th session. The outline of the report shall be presented by 12th session for approval. The report must be submitted by 20th session. The report shall not exceed 15 pages 1½ space 12 Times New Roman excluding title index and bibliography etc. late submission will be penalized. Each group shall select a Financial Institution or a topic of interest for the detailed analysis. Group members shall be asked to remain abreast with the developments taking place in the marketplace, through financial press. The impact of current developments taking place, which are pertinent to their selection of study, shall be monitored and compiled by the group. The group is expected to apprise the class with their observations through class participation. Final Comprehensive Examination 30% The examination could be mix of MCQ short exercise and short explanations. Students may also expect a question or two from the assigned report or a case or a situation analysis. There is a zero tolerance for any undesirable behavior to undeserving attempt to improve your grades during the quizzes and examinations EXAMINATION DETAIL Midterm Exam NO Final Exam Yes: Combined Duration: 120 minutes Exam Specifications: only calculator is allowed, closed book, closed notes 4

5 COURSE OVERVIEW Lahore University of Management Sciences PART 1 INTRODUCTION AND OVERVIEW OF FINANCIAL MARKETS CHAPTER 1, 2, 3, & 4 WEEK/ LECTURE/ MODULE Day 1 Day 2 Day 3 Day 4 Introduction TOPICS An Overview of Financial System Financial Markets and Institutions Determination of Interest Rates RECOMMENDED READINGS Introduction to the course requirements Why Study Financial Markets and Institution; An over view of the Economic System. Role of Savings and Investments. Overview of Comparative Financial Systems; An Overview of Islamic Financial System, Environments and Regulatory Framework Globalization of Financial Institutions and markets. Recent developments in the world financial markets. An overview of Financial Institutions in Interest rate fundamentals; Loan able funds theories; Movement of interest rates over time; Determinants of interest rates; Term structure of interest rates; Forecasting interest rates. Impact of interest rates A short discussion on TVM and security valuation issues SESSION OBJECTIVES To Introduce and acquaint the subject matter to be covered in the course. To Introduce and acquaint the subject matter to be covered in the course. ( continues ) An introduction of different types of Institutions To revisit TVM, with emphasis of relating cash flow patterns with various financial products. PART 2 SECURITIES MARKETS CHAPTERS 5, 6,7,8,9 &10 Day 5 Money & Capital Markets Fixed Income Securities An overview of Money and Capital Market and Instruments; Brief Explanation of some of the Money Market Instruments. To be able to understand the dynamics of Money and capital markets Day 6 Capital Markets Bond Markets International Bond Market; Bond Valuation and simple Illustration of Duration. Money Market and Bond market in Some issues related to bond markets and its recent developments Day 7 Day 8 Mortgage Markets Capital Markets (Stock Markets) A brief introduction to the mortgage backed Securities; Asset backed securities. A brief review of subprime credit crunch. Stock Markets around the world. An Overview of the stock markets around the world and in. Some issues pertaining to Stock Market in. Role CDC and NCCLP and Issues such as Margin Financing. To have a basic understanding of Real estate financing, To understand the dynamics of Stock markets and essentials of stock exchanges Day 9 Other Financial Markets: FOREX Market Other Markets (Foreign Exchange Markets, Commodity Markets & Derivative Securities To understand the forex markets from an International FOREX 5

6 Markets). An Overview of Forex market and Interest rates, International quotations conventions; Foreign exchange rates and transactions. conventions. Day 10 Other Financial Markets: Derivative Securities Markets An overview of Derivative Securities Markets. Spot, Forwards, Futures, FRAs and Swaps. Options; Calls, Puts, Caps; Floors and Collars etc. Exotics and Some new arrivals on derivative markets Risk management with swaps; Interest rate swaps, currency swaps and credit swaps. Interest rate Risk Management with Caps, Floors and Collars. An overview of the derivative products and Markets. An introductory discussion on risk management with derivatives PART 3: FINANCIAL INSTITUTIONS COMMERCIAL BANKS AND REGULATIONS CHAPTER 11, 12 AND 13 Day 11 Commercial Banks Definition of a Commercial Bank; Balance sheet and recent trends; Commercial Banking as a sector of Financial service Industry; Structure and composition of Industry To introduce Commercial Banking Industry and its Balance sheet Day 12 Commercial Banks. (Continues) Technology in commercial Banking; Regulations; Global issues. Commercial Banking in. Islamic Banking initiatives in : Micro finance Banking. Role of technology in Commercial Banks. Recent developments and how futures look like Islamic banking overview. And the scope and developments. Day 13 Commercial Banks and Financial Statement Analysis Depository Institutions' Financial Statement Analysis, Financial statements of a commercial bank; Return on Equity and its components. SBP suggested ROE decomposition. What is CAMEL? To understand the framework of financial Analysis of Commercial Banking Day14 Regulation of Commercial Banks Regulatory environments of commercial banks in USA and in ; banking council and scope of banking association. Some Important Regulations. Global Regulatory issues Role of a Central Bank; Money supply & interest rates; monetary policy tools; other issues related to monetary policy; Central Banking and its regulatory role in ; Prudential regulations. Regulatory architecture in place, A review of historic regulatory land marks and recent developments. 6

7 PART 4 OTHER FINANCIAL INSTITUTIONS CHAPTER 14, 15, 16, 17& 18 Day 15 Regulation of. On Bank Financial Institutions Role of SECP in regulating non bank FI s; Experience of Development Financial Institutions, Role of DFIs in. Study of Modarabas, other Islamic Modes of Financing in, Leasing Association of ; Investment Bankers Association of and Mutual Funds association of. To apprise with regulatory challenges for non banking institutions Day 16 Other Lending Institutions Thrifts, Saving Institutions, Credit Unions Finance Companies; Cooperative Credit societies. in, Postal Saving Banks and National Directorate of Savings To have basic understanding of thrift institutions Day 17 Insurance Companies The categories of insurance companies. Life Insurance companies, Balance sheet trends. Property and causality insurance. Global Issues. Insurance in Takaful the Islamic Insurance. To understand the role and place of insurance industry in a financial system. To critically examine the challenges of Insurance Industry in. Day 18 Security Firms and Investments Banks. Services Offered by Securities Firm and Investment Banks. Main Activities, Investment banking, Trading, Investing M& A, Private Equity, Venture Capital, Wealth Management and other services. To understand the issues related to Investment banking Day 19 Mutual Funds An overview of Mutual funds. Closed End Funds and Open End Mutual Funds Different Types of Mutual Funds, ETF s and Ultras To get acquainted with different types of Mutual Funds and investment companies Day21 Mutual Funds Continues Mutual Funds return and Costs. Mutual Funds balance sheet and recent trends. Some Global and regulatory issues. Day 22 Day 23 Hedge Funds and Pension Funds Types of Hedge Funds, Offshore Hedge Funds. Regulatory challenges for hedge funds. Pension Funds.defined benefits vs. Defined contribution pension funds; Private and Public Pension Funds. A brief overview of Pension Funds in. To understand the phenomenon of Hedge funds. How they emerged and the regulatory challenges it poses. State of Pension Funds and its developments. 7

8 PART 5 RISK MANAGEMENT IN FINANCIAL INSTITUTIONS CHAPTER19,20,21, &24 Day24 Types of Risks faced Financial Institutions Why Financial Institutions need to manage a risk; A brief discussion on different types of risks. Understand various type of risks. Day 25 Managing Credit Risk on the Balance Sheet. Chapter overview; Credit analysis; Real Estate Lending. Lending to Small and Medium size business. Calculating Return on Loans ROA and RORAC Models. Loan portfolio risk and Management. To get familiar with some of the models and ways to assess credit risk and how it can possibly be mitigated by FI s Day 26 Managing Risk Off the Balance Sheet with Loan Sales and Securitization A major cause of recent crisis in western financial system. To be discussed in class. Its impact on rethinking on Risk parameter, dynamics and overall Risk Landscape Managing Risk through Loan sales and Securitization. Moral Hazard issue in Loan sales and Securitization. Securitization in Securitization of other assets; Role of Securitization in crises. To understand the last major financial crises and role of new genre of derivatives and financial innovation, almost derailed the western financial System. Understanding the applications of securitization. Presentations Day 27, Presentation (Group 1 to 4) Day 28 Presentation (Group 5 to 8) TEXTBOOK(S)/SUPPLEMENTARY READINGS Required Text Financial Markets and Institutions. By Anthony Saunders & Marcia Millon Cornett 4th edition Recommended Additional Readings, Books and Other Material 8

9 Trends in Lending policies in Banking Industry Trend in -use of modern technology in Swift and other payment systems Lahore University of Management Sciences Risk Management Process, and Risk Management in Derivative Markets in SOME OF THE SUGGESTED TOPICS Islamic Banking in Islamic Insurance(Takuful) (Islamic Bonds, Sakuks Insurance industry in Mutual Funds Industry in Role SBP and SECP in Regulatory agencies in. Financial Conduct and Prudential Authority in UK and its effectiveness. Regulatory challenges being faced and efforts to find a global regulatory Architecture IMF conditional ties and its impact on Financial institutions in Rating in (PACRA & JCR-VIS) International rating of i Banking Sector PIIGS debt crises and its fallout on Financial Markets Shape of Emerging Financial System Fixed Income Securities Market in Yield curve of debt market. Foreign Exchange Market in FDI, Flight of capital and Money Laundering And Hawala System Its impact on economy of Micro credit in, Successes and Failures. Indian experience. Postal Saving and insurance in Japan and in Presentation on Securitization In Global impact of Sub Prime lending and its impact on Foreign Exchange Crises. Fall of Dollar and the Euro Trends in commercial Banking; Consolidation and mergers in Banking Sectors in Privatization of Banking sector Paul Volcker s Rule and its Implications Pension Funds and Employees Welfare Funds in, EBOI Efficiencies and Inefficiencies in capital Markets of. Forensic Report on Stock Market /CFS, Badla and Margin Financing Insiders trading Rules and controlling it Wall Street movement. What is it and is it fizzling Central Depository Scope of a other Custodian Banking Specialized Financial Institution Role and Scope of SMEADA SME Banking The Dodd-Frank Act (fully known as the Dodd-Frank Wall Street Reform and Consumer Protection Act) What is it Cooperative banking experience in Associations of non Banking Financial sector Housing Finance by HBFC and Commercial Banks in, Scope of REITS Syndication in The State and scope of Consumer Financing in Any other topics proposed by a students and approved by the instructor Demutualization of stock Markets and merits and demerits Any Other Topic, Suggested And Approved By The Instructor. 9

10 ON THE SIDE AGENDA (Article Presentations) Invitation to form groups. Some of the topics to be assigned. A brief study of Stock Market in ; Inefficiencies in Stock Market Bonds Market in ; TFC s &Islamic Bonds (Sakuks Foreign Exchange and Scope of Derivative Markets in Islamic Banking in Saving Institutions Cooperative banking experience in Analytical framework of Statement Analysis of financial sectors in SMEDA and Microfinance. Grameen Bank Of Bangladesh &. Kashaf Bank. of Derivative Markets in Presentation on Securitization in Recent Developments and Role of Investment Banking in. Pension Funds and Employees Welfare Fund SECP regulation on Insurance Islamic Insurance (Takuful) Risk Management in Leasing Scenario in. Presentation on Modarabas; Islamic Modes of Financing Regulatory Framework Need and scope of FSA of UK authority in. Presentation on Diminishing Musharika. 10