Course: Advanced Finance Banking and Insurance, 2015/2016

Course Outline

Advanced Finance Banking and Insurance

Course Code: E_BA_AFBI

Lecturers:

Prof. dr. Dirk Schoenmaker (DS)

Room: 7A (Finance Department); Office hours: by appointment
Email: d.schoenmaker@vu.nl
Dr. Peter Wierts (PW) (Coordination)
Room: 7A (Finance Department); Office hours: by appointment
Email: peter.wierts@vu.nl

Central Themes:
1. Theory of financial markets and institutions

Financial crisis and (in)stability

What are the functions of financial markets?

What is the role of institutional investors, including hedge funds

and private equity?

What is the theory that underpins the business of banking and insurance?

How are risk management models used in banks and insurers?

2. Degree of financial integration

Are financial markets already integrated in Europe?

Which strategies can financial institutions apply to achieve their

expansion in Europe?

What are the challenges and barriers to European expansion?

3. Financial supervision and competition in the financial sector

How can financial stability be fostered at the European level?

What instruments can be applied to open national markets?

Program focus: The impact of the European environment on the financial sector with
special attention to the functioning of financial institutions in macro
and micro dimensions.
Requirements: Knowledge on the level of text books/course
- Garry Koop (2005), Analysis of Economic Data, Chichester: Wiley;
- Ross, Westerfield and Jordan (2003), Fundamentals of Corporate
Finance, Boston: McGraw-Hill; and
- BWS-BA course: Introduction to Finance Banking and Insurance
(year 3).

Schoenmaker /Wierts

File: BB AFBI 1516 Course Outline 1

Course: Advanced Finance Banking and Insurance, 2015/2016

Learning objectives:

In the first part, this course provides an insight in the working

of financial markets and institutions in the European context.
In the second part, the key policy areas for the financial sector
are covered. It pays attention to the implications for systemic
crisis management of financial institutions.

Credits:

6 ects

Method:

Lectures and assignments

Exam:

Written exam (60%); closed book.

Assignment (40%); group work
Minimum grade for exam and assignment (5 each).

Period 1:

Weeks: 36-43

Lectures:

Mondays:
Thursdays:

11.00-12.45 hours, room: WN-KC159

9.00-10.45 hours, room: HG-10A00

Assignments: week 40-41

Monday sessions: 13.30-15.15 hours, room HG-02A24
Thursday sessions: 11.0012.45 hours, room HG-02A33
Literature:
Textbook:
De Haan, Jakob, Sander Oosterloo and Dirk Schoenmaker (2015), Financial
Markets and Institutions. A European Perspective, Cambridge University Press,
Cambridge. (This is the new Third Edition)

Schoenmaker /Wierts

File: BB AFBI 1516 Course Outline 1

Course: Advanced Finance Banking and Insurance, 2015/2016

Assignment: explaining financial structure dynamics after the financial crisis

During the past years since the financial crisis of 2007-2008, strong changes in the
structure of the financial system have taken place. For example, banks needed to comply with the new Basel 3 regulations and faced legacy issues from the financial crisis.
And whereas insurance companies and pension funds have been under pressure from
the low interest rate environment, different types of asset management companies
showed strong growth, partly as a result of search for yield in a low interest rate environment. More generally, the European Commission has started a strategic agenda to
make the EU financial system less bank-based and more market-based.
Whereas the structure of the financial system is highly dynamic, its functions are much
more stable. In this assignment you have to analyse financial market developments
in the European Union since the financial crisis for a particular type of financial institution (that you choose), and summarise the main current risks and opportunities in
this sector.
Your academic consultancy report focuses on the EU and addresses for each type of
institution: its business model, the impact of the external environment (including: the
influence of regulation, low interest rate environment, any other relevant factors), the
main dynamics since the financial crisis (e.g. in terms of size, main players, profitability,
or any variable that you regard the most relevant), the main current opportunities and
threats. Tip: please do not feel obliged to cover everything, but focus your report on the
most relevant parts; you may also decide within your group to cover a specific part of
the industry only (e.g. life insurance or property & casualty insurance).
Financial institutions/sectors on which the different reports can focus: banks, insurance companies, pension funds, mutual funds, private equity, hedge funds. You have
to subscribe to your group & type of financial institution by yourself via Blackboard,
after the first lecture. Tip: think about developing your focus beyond banking!
The reports will be evaluated according to the:
- The quality and originality of its qualitative and quantitative analysis; and
- The quality of the drafting, structure, and formatting. Tip: think about planning
the work in stages, e.g. (i) collecting the raw material, and (ii) re-drafting the
report into something that is short, focused and readable (while leaving out
non-essential information).
Format assignment:
- 14-16 pages A4 (excluding title page and references, but including Tables an
Figures as part of the main report); 16 pages is a strict maximum.
- line spacing: 1.5
- Title page with: Title / subtitle; Name contributors and student numbers; Date;
File name: year, name course, group number and topic. Header/footer on pages with group number and title of the report.
- Page numbers, references etc.
- One page management summary
- Clear problem formulation, conclusions and recommendations

Schoenmaker /Wierts

File: BB AFBI 1516 Course Outline 1

Course: Advanced Finance Banking and Insurance, 2015/2016

Info assignment:
Character report: (Academic) consultancy report
Hand-in date first versions:
Monday-sessions on the previous Thursday, 17.00 hours;
Thursday-sessions on the previous Monday, 17.00 hours;
Upload pdf files on Blackboard in the format of: 1516aFBI_GroupNumber.
And send this pdf file by email to peter.wierts@vu.nl,
Hand-in date revised, final versions: Friday 23 October, 17.00 hours;
Upload
pdf
files
on
Blackboard
in
the
format
of:
1516aFBI_GroupNumber_final. And send this pdf file by email to peter.wierts@vu.nl.
Payment: 40% of final grade for FBI
Teams: Research team of 4-5 students
Presentation: depending on the nr. of groups, approximately 20 minutes per
group split up in: a 10-minutes presentation of the research by 1 student, followed by a 10-minutes discussion. The discussion will be opened by fellowcolleagues from the other assignment groups. Presentation and critiques are
taking into account for grading.
For questions and supervision on the assignments: Peter Wierts, immediately after
the lecture on Monday, or by appointment.

Schoenmaker /Wierts

File: BB AFBI 1516 Course Outline 1

Course: Advanced Finance Banking and Insurance, 2015/2016

LECTURE SCHEDULE:
Part I: Setting the Scene
1.
2.
3.
4.

Functions of the Financial System

Financial Crises
Monetary Policy of the European Central Bank
European Financial Integration: Origins , history and economics

Part II: Markets and Institutions

5.
6.
7.
8.
9.

European Financial Markets and Financial Infrastructure

Financial Innovation
The Role of Institutional Investors
European Banks
Insurers and Financial Conglomerates

Part III: Policies for the Financial Sector

10. Financial Regulation and Supervision
11. Financial Stability
12. Competition Policy

Assignments on financial structure dynamics after the financial crisis.

Schoenmaker /Wierts

File: BB AFBI 1516 Course Outline 1

Course: Advanced Finance Banking and Insurance, 2015/2016

Course:

Advanced Finance Banking and Insurance

Schoenmaker / Wierts
LEC

DATE

THEME / CONTENT / LITERATURE

Part I: Setting the Scene

1

Week 36
31-08-15
PW

Theme: Functions of the Financial System

Content:
Functions of the financial system
o Reducing transaction costs and information asymmetries
o Trading, diversification, and management of risk
Bank-based versus market-based financial systems
o Corporate governance
o Legal view
o Shadow banking
Financial systems and economic performance
Assignment on financial structure dynamics after the financial cri-

sis
Literature:
De Haan, Oosterloo and Schoenmaker - Ch.1. p 3-38
2

Week 36
03-09-15
DS

Theme: Financial Crises

Content:
Crises concepts
Credit crisis of 2007-2009
The sovereign debt crisis
Literature:
De Haan, Oosterloo and Schoenmaker - Ch. 2. p.39-78

Week 37
7-09-15
PW

Theme: Monetary Policy of the European Central Bank

Week 37
10-09-15
DS

Theme: European Financial Integration: Origins and History, and the

Economics of integration

Schoenmaker /Wierts

Content:
Monetary integration
Coordination of fiscal and economic policies
ECB policy strategy
ECB policy tools
Monetary policy during the crisis
Literature:
De Haan, Oosterloo and Schoenmaker Ch. 3, sections 3.5 + 3.6 p. 8998. Ch. 4. p.108-152

Content:
European integration
o Introduction EU and enlargement

File: BB AFBI 1516 Course Outline 1

Course: Advanced Finance Banking and Insurance, 2015/2016

European institutions and instruments

Financial integration
o Internal Market
o FSAP
o Banking Union
Measuring financial integration
o News-based measures
o Price-based measures
o Quantity-based measures
Integration of European financial markets
Consequences of financial integration
o Impact on economic growth
Literature:
De Haan, Oosterloo and Schoenmaker - Ch 3. p.79-89 + 98-107 and Ch
6. 195-215

Part II: Markets and Institutions

5

Week 38
14-09-15
PW

Theme: European Financial Markets and Financial Infrastructures

Content:
Financial products trade on markets
Structure of financial markets
Pricing on financial markets
Turmoil on European financial markets, 2011
Payment systems and post-trading services
Economic features of payment and securities market infrastructures
o Economies of scale
o Network externalities
Integration of financial market infrastructures in the EU
o Barriers to integration
o Public policies to strengthen integration
Literature:
De Haan, Oosterloo and Schoenmaker - Ch. 5. p. 155-194 and Ch 7.
p.216-247.

Week 38
17-09-15
DS

Theme: Financial Innovation

Content:
Financial innovation
o Causes and consequences
o Pros and cons
o Risks
Rating Agencies
Shadow banking
Literature:
De Haan, Oosterloo and Schoenmaker - Ch. 8. p.248-278

Schoenmaker /Wierts

File: BB AFBI 1516 Course Outline 1

Course: Advanced Finance Banking and Insurance, 2015/2016

Week 39
21-09-15
PW

Theme: the Role of Institutional Investors

Content:
Different types of institutional investors
o Pension funds, life insurers and mutual funds
o Private equity and hedge funds
Growth of institutional investment in Europe
Home bias in investments
o International CAPM
o Empirical evidence
Literature:
De Haan, Oosterloo and Schoenmaker - Ch.9, p.281-318

Week 39
24-09-15
DS

Theme: European Banks

Content:
Theory of banking
o Drivers of profitability
o Banks as liquidity provider
o Banks as delegated monitor
Use of risk management models
The European banking system
Literature:
De Haan, Oosterloo and Schoenmaker - Ch.10 p.319-357

Week 40
28-09-15
PW

+
Assignment
Group 1:
PW

Theme: European Insurers and Financial Conglomerates

Content:
Theory of insurance
o Drivers of profitability
o Mathematics of insurance
o Adverse selection
Use of risk management models
The European insurance scene
Financial conglomerates
Literature:
De Haan, Oosterloo and Schoenmaker - Ch. 11.p.358-402

Part III: Policies for the Financial Sector

10

Week 40
01-10-15
DS
+
Assignment
Group 2:
PW

Schoenmaker /Wierts

Theme: FINANCIAL REGULATION AND SUPERVISION

Content:
Rationale for regulation
Prudential Supervision
Conduct of Business
Supervisory structures
o Single supervisor model
o Twin peaks model
European supervision
o Banking trends: integration and centralisation

File: BB AFBI 1516 Course Outline 1

Course: Advanced Finance Banking and Insurance, 2015/2016

The European banking union will be presented in our companion

course Financial System Design, 4.5.

Literature:
11

Week 41
05-10-15
PW

+
Assignment
Group 3:

PW

De Haan, Oosterloo and Schoenmaker - Ch. 12. p.405-447

Theme: Financial Stability
Content:
The concept of financial stability
Tools of maintaining financial stability
The organisational structure of financial stability
The Euro Area Financial Markets
o Imbalances, instability and contagion
EU banking: risks and stability
o Risk management and shock absorption
Macro (prudential) control
Link macro/micro control
Literature:
De Haan, Oosterloo and Schoenmaker - Ch. 13. P448-483

12

Week 41
08-10-15
DS
+
Assignment
Group 4
PW

Theme: Competition Policy

Content:
Theory of competition policy
Pillars of competition policy
o Antitrust
o Mergers
o Liberalization/state aid
Market definition and assessment of dominant position
State Aid banks
Network of European competition authorities
Competition in international perspective (EU/US dimension)
Overview Course aFBI
o Evaluation and outlook: European financial system
Literature:
De Haan, Oosterloo and Schoenmaker - Ch. 14. pp 484-513

Week 43:
22-10-15
Week 50:
10-12-15

Exam:

Week 43:
23-10-15

Hand in final version assignments, 17.00 hrs.

Schoenmaker /Wierts

18.15-21.15 hours, IN-OB60

Re-Exam: 18.15-21.15 hours, HG-08A33

File: BB AFBI 1516 Course Outline 1