Lecture Slides 1

Theoreticel Banking and Securitization
Lecture 1
Eva Schliephake
Bonn University
April 11, 2016
schliephake@uni-bonn.de
Banking and Securitization
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Introduction
Organization
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Time: Monday 10.15-11.25, Wednesday 08.30-10.00

Room: SR 0.017
Level: Master, PhD
Contact details
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Office: Juridicum Altbau/ ground floor

e-Mail: schliephake@uni-bonn.de
Office hours
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please send an e-mail with your request and a suggested

time
Course material
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eCampus Course: Banking and Securitization
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Introduction Round
Who are you?

Did you hear any (theoretical) Banking/Finance
courses before?
What do you expect from this course?
What are you particularly interested in?
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The aim of the course
Review of the research in the area of theoretical

financial intermediation
Explain the basic informational problems and
externalities that makes banking special
Explain tools to analyze the occurrence of financial
crisis and future challenges of financial fragility
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This course should enable you

To understand the basic problems and challenges in
banking
To understand the development and current trends in
modern banking
To use the theoretical banking toolbox evaluate
policy and regulation
To work with acadamic literature
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Structure of the Course - Organisation

Lecture
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Summarize and explain theoretical models

Discuss the main mechanisms and policy implications
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Lecture
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Reading
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Original articles and state of the art research
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Lecture
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Reading
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Assignments
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Together we discuss and solve problems related to the

models discussed in the lecture
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Lecture
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Reading
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Assignments
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Together we discuss and solve problems related to the

models discussed in the lecture
Preparation of Final Exam

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Active participation in the lecture and assignments

Reading the fundamental papers
Understanding of teaching material
Ability to argue with the models discussed
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Organisation
Questions?
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Structure of the Course - Content

1 Classical Theories of Banking
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Why do banks exist? What problems do they

solve?/create?
Banks as providers of liquidity
Banks as delegated monitors
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solve?/create?
2 Banking and the Real Economy

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Why are banks so important? Why do they need to be

regulated?
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solve?/create?
2 Banking and the Real Economy

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Why are banks so important? Why do they need to be

regulated?
3 Banking Regulation
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Main regulations and their aim: From Basel I to the

Banking Union/Dodd Frank Act
How did/do banks react?
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Structure of the Course - Content II

4 Securitization
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What is Securitization? How does it (not) work?

What are the benefits and costs?
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4 Securitization
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5 Financial Crisis
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What do financial crisis have in common?

What was special?
How do financial and government debt crisis interact?
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4 Securitization
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5 Financial Crisis
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What do financial crisis have in common?

What was special?
How do financial and government debt crisis interact?
6 Aftermath of the Crisis

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Why is the Eurozone trapped in a continuing crises?

Ways out? Future Challenges?
Financial Stability and Monetary Policy
Banking and Negative Interest Rates
Future Crisis?
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Recommended General Literature

In each chapter references to the seminal research
papers will be provided (can be found on eCampus)
Very good textbook on the general models (Doesnt
cover the recent crisis articles): Freixas, X., Rochet,
J.-C. (2008), Microeconomics of Banking, 2nd ed.,
Cambridge, MA: MIT Press
Allen, F., Gale, D. (2007), Understanding Financial
Crises, New York, Oxford University Press
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Content and Literature
Questions?
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Content and Literature
Questions?
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Lets start!
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The Financial System

In strict terms, financial systems consists of:
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financial markets
financial institutions
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The Financial System

In strict terms, financial systems consists of:
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financial markets
financial institutions
In a broader view, it also contains:

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financial assets and instruments

economic agents (individuals, households, and firms)
governments and central banks
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Traditional Finance - Endowment Economy
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Traditional Finance - Endowment Economy
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Maturity and Lot-Size Mismatch
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Maturity and Lot-Size Mismatch
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Traditional Banking Finance
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Traditional Banking Finance
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Traditional Banking Finance II
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Traditional Banking Finance III
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Typical Balance Sheet of a Bank
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Typical Balance Sheet of a Bank
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Modern Institutional Finance
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Financial Institutions
Operate within or outside financial markets and play

an intermediate role between savers and borrowers.
They are distinguished into deposit-taking institutions
and non-deposit taking ones
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Depository institutions
Commercial banks
Also: Mortgage and Loan companies, Savings and
Loan (SL) Associations, Mutual Saving Banks, Credit
Unions
Hold a large share of the nations money stock in
various types of deposits
Play a key role in the transmission of monetary
policy, to borrowers and depositors
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Non-Depository institutions
Insurance companies
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Accept premiums, invest and, in return, pay

compensation should a certain event occurs
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Insurance companies
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Pension funds
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Invest individuals money into financial markets with the

purpose to provide retirement payments.
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Insurance companies
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Pension funds
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Mutual funds
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Manage a pool of money invested in a specified variety

of assets, mostly securities.
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Insurance companies
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Pension funds
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Mutual funds
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Manage a pool of money invested in a specified variety

of assets, mostly securities.
Investment Banks
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Acting as an intermediary between an issuer of securities

and the investing public,
Facilitating mergers and other corporate reorganizations,
Broker for institutional clients.
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Total Financial Assets as % of GDP
Development till 2007

Total Financial Assets (% of GDP)
90%
Mutual Funds + Hedge

Funds + Broker/Dealers
80%
70%
80%
Commercial Banks
60%
60%
Mutual Funds
50%
40%
40%
Security Brokers and Dealers
30%
Hedge Funds
20%
20%
Total Financial Assets (as % of GDP)
100%
100%
10%
0%
0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Brunnermeier (2012)

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Development till today

Financial crisis triggered by the US-real estate sector
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Not constrained to regions/countries but global effects

Contagion to the real sector
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Collapse of the market for subprime mortgages
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Fall in value of structured financial products

Fire sales reinforced trend
Loss of trust in the interbank market
Credit crunch
Huge write offs at banks
Bank insolvencies, huge public bailouts
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Fall in value of structured financial products

Fire sales reinforced trend
Loss of trust in the interbank market
Credit crunch
Huge write offs at banks
Bank insolvencies, huge public bailouts
Economic and Government Debt Crises
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The Role of Securitization

Securitization is a measure to facilitate risk
management
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management
Introduced new bank business model:
originate-to-distribute (OTD)
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Bank originates loan to pool risks, tranch, insure (CDS)

and resell it as Asset backed security (ABS)
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management
Introduced new bank business model:
originate-to-distribute (OTD)
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Bank originates loan to pool risks, tranch, insure (CDS)

and resell it as Asset backed security (ABS)
Problems:
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Primary role of banks to screen and monitor loans is

disregarded
Risk allocation becomes complicated, intransparent and
untraceable
Result: Increased systemic risk and financial

contagion
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Challenges
Banking Regulation
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Macro vs Microprudential Regulation

Evaluation of systemic risk
Reduction of Procyclical effects of regulation
Resolution of internationally active banks
Problems:
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Domestic interests
Myopic governments
Political capture / Lobbyism
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Outlook
We will come back to all these points during the

lecture.
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Outlook

lecture.
Other points?
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Outlook

lecture.
Other points?
Next session: Classical Theories of Banking
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Theoreticel Banking and Securitization

April 11, 2016

Banking and Securitization

April 11, 2016

Time: Monday 10.15-11.25, Wednesday 08.30-10.00

Office: Juridicum Altbau/ ground floor

please send an e-mail with your request and a suggested

eCampus Course: Banking and Securitization

Banking and Securitization

April 11, 2016

Who are you?

Banking and Securitization

April 11, 2016

The aim of the course

Review of the research in the area of theoretical

Banking and Securitization

April 11, 2016

This course should enable you

Banking and Securitization

April 11, 2016

Structure of the Course - Organisation

Summarize and explain theoretical models

Banking and Securitization

April 11, 2016

Structure of the Course - Organisation

Summarize and explain theoretical models

Original articles and state of the art research

Banking and Securitization

April 11, 2016

Structure of the Course - Organisation

Summarize and explain theoretical models

Original articles and state of the art research

Together we discuss and solve problems related to the

Banking and Securitization

April 11, 2016

Structure of the Course - Organisation

Summarize and explain theoretical models

Original articles and state of the art research

Together we discuss and solve problems related to the

Preparation of Final Exam

Active participation in the lecture and assignments

Banking and Securitization

April 11, 2016

Banking and Securitization

April 11, 2016

Structure of the Course - Content

Why do banks exist? What problems do they

Banking and Securitization

April 11, 2016

Structure of the Course - Content

Why do banks exist? What problems do they

2 Banking and the Real Economy

Why are banks so important? Why do they need to be

Banking and Securitization

April 11, 2016

Structure of the Course - Content

Why do banks exist? What problems do they

2 Banking and the Real Economy

Why are banks so important? Why do they need to be

Main regulations and their aim: From Basel I to the

Banking and Securitization

April 11, 2016

Structure of the Course - Content II

What is Securitization? How does it (not) work?