The Financial Crisis and The Reform of the Financial System

Course Description:

This course will cover the origins and development of the worldwide financial crisis in 2007 and 2008, the governmental response thereto, principally in Europe and the United States, and explore the progress that has been made with regulatory reform since then.

The first part of the course will cover the roles in the origins of the crisis played by (i) the key elements of financial innovation, in particular derivatives, securitization and the originate to distribute model, (ii) regulators, supervisors and central banks, focusing on regulatory philosophy, regulatory incentives and the potential and incentives for regulatory arbitrage and (iii) internal factors within financial institutions and other market participants, including executive compensation, corporate oversight, risk management and the outsourcing of due diligence to credit rating agencies.

The second part of the course will follow the development of the crisis, examining various transmission mechanisms which contributed to its spread worldwide, as well as the governmental responses thereto, based on the alternative analyses of the crisis as either a liquidity or a solvency crisis.

The third part of the course will outline the principal alternatives being pursed in the US and Europe for regulatory reform, including in particular the need for more intensive regulation of systemically relevant institutions, and evaluate these alternatives in light of the analysis of the origins and development of the crisis. The issues considered will include the design and implementation of bank resolution regimes, including the international aspects thereof, proposals for bail-ins, and other aspects of “too big to fail”, the Volcker Rule and the “ring fencing” proposals of the Vickers Report and the Liikanen Group, alternatives for dealing with credit rating agencies and the design and implementation of the Basel III regime. Finally, it will sketch out the key consequences of the regulatory reforms already adopted or currently being pursued on the operations of multinational financial institutions in Europe and conclude with an evaluation of whether the crisis is behind us or still with us.

Reading/Textbooks:

  • The Financial Crisis Inquiry Report, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United, Authorized Edition, Public Affairs, 2011
  • Alan S. Blinder, After the Music Stopped, The Financial Crisis, the Response, and the Work Ahead, the Penguin Press, New York, 2013.
  • Martin Wolf, The Shifts and the Shocks, What we’ve learned – and still have to learn, Penguin Books, 2014

Credit Points:

5

Lecturer(s):

Patrick Kenadjian

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