Capital Markets and Financial Institutions – How to Survive Them

Perfect Capital Markets Problems Caused by Private Information

In Week 1 we propose the set of assumptions and the framework of our discussion We will discuss perfect capital markets and see how the deviations from this idealized model that are observed in our real life result in the demand for financial intermediation and for the services of financial institutions We will discuss the fundamental problems caused by the existence of private information (moral hazard и adverse selection) and the damage they lead to Based on the most simplistic models you will be able do delve deeper into the core of these problems and to evaluate their potential scale You will learn what role the moral hazard plays in insurance, and how the adverse selection and moral hazard problems reduce the efficiency of lending

ALLEVIATION OF MORAL HAZARD – DEBT AND EQUITY CONTRACTS BANKS (1) – DIVERSIFICATION AND MONITORING

In Week 2 we will consider certain ways of overcoming problems caused by private information and evaluate them We will know why some methods work while others don’t, and why You will learn the core differences between equity and debt financing, study debts contracts with liquidation and see the core inefficiency of that kind of a debt contract Based on a simple model you will study diversification and delegated monitoring and see how they contribute to the efficiency of lending We will find out how a bank emerges as a key financial intermediary responsible for asset monitoring You will be able to see why the bank can make money and to calculate its profit in different cases At the end of Week 2 we will pose a fundamental question: How does the bank attract depositors?

Banks (2) – Asset Transformation and Liquidity Creation Banks’ Vulnerability with Respect to Runs

Week 3 of the Course is devoted to the analysis of creation of liquidity – namely, we do answer the question of how a bank attracts depositors You will get introduced to asset transformation and will learn how the presence of banks in capital markets makes the money circulation in the economy more efficient You will analyze the market participants’ preferences and the “safety cushion” of a bank We will study the mechanism of bank runs and feel how vulnerable the bank is with respect to runs You will learn what methods of fighting bank runs have been used in centuries, and realize why the role of government in regulating of the banking business is so important We will discuss deposit insurance as a universal and effective mechanism of preventing runs

Bank Regulation and Reform Payment Services Mobile Banking Bank 3.0

Week 4 of the Course consists of two parts The first part is devoted to the discussion of challenges and development of banking regulation We consider the S&L market crash of the 1980’s as a trigger to the initiation of the worldwide regulatory movement You will get introduced to the Basel process as the basis of the modern bank regulation The second part of Week 4 shifts focus somewhat We will talk about the payment services that are tantamount to banking for the majority of population, at least in the developed world We will discuss how the fast development of IT technologies, the Internet and the social media influences banking business But we will see that the most important functions of banking – asset monitoring and liquidity creation – do not disappear but take a new shape At the very end we will drop a few words about private banking – a very specific area of banking services for high net worth individuals

Public Investments and Investment Banking

Week 5 of the Course is devoted to public investments and investment banking We consider the major activities of investment banks – underwriting, trading, consulting, and financial innovation We study the details of underwriting and the core reasons for underpricing as an important phenomenon that determines the observed behavior of market participants in the process of financing We also discuss the mechanism of market bubbles and crises as well as the role of investment banks and other financial institutions in the crisis development That sets the background for the idea of regulation of investment banks

СМО and the 2008 World Financial Crisis The Ascent of Moral Hazard Globalization Wrap-Up Some Positive Messages

Week 6, the final week of the Course covers securitization and CMO’s We will reveal the role of the CMO market in the development of the world financial meltdown that peaked in 2008 and, as many believe, is not yet over We will study the details of the role of CMO’s in the development of the crisis We will consider the measures taken by the regulators, the “too big to fail” phenomenon, and will understand why the governments so actively helped the biggest international investment banks found to have been on the verge of bankruptcy We will also talk about the globalization of capital markets and the first signals of a counter-trend – de-globalization We will clearly see how modern geopolitical and technological trends contribute to the ascent of moral hazard that is now a global problem Finally, some clear and useful recommendations are provided As a result, you will be able to successfully apply the obtained knowledge and skills not only in finance but also in your career and life in general