The work program on the course: “Management of financial institutions”

MINISTRY OF EDUCATION AND SCIENCE OF REPUBLIC OF KAZAKHSTAN

NEI «ALMATY MANAGEMENT UNIVERSITY»

DEPARTMENT OF FINANCE

Approved
at the meeting of the Educational and Methodic Council
Chairman

______________N. Duisengulova

«_28_»___08_______ 2014_.

Academic program: Master program

Specialty: 6M050900 – “Finance”

The work program

on the course: “Management of financial institutions”

Almaty, 2014

Compiled by: ______________ Ph. D., Associate Professor, S. Massakova

The working program has been developed for students of the specialty 6M050900- "Finance"

The working curriculum was reviewed at the meeting of the Department of “Finance”

Protocol № 1 from “27” _ 08__ 2014.

Head of the department__________________

d. e.s.,professor _____________________ _ P. Issakhova _

Introduction

The course focuses on the theory, practice of managing financial institutions, and its prospects in the new millennium. As well as microeconomic issues related to financial institutions, covering key areas such as what singles a bank out from other financial institutions, the diversification of financial institutions into non-finance financial activities, different types of financial institutions within a finance structure, bank failures, and so on.

The discipline "The finance systems of the world" provides students with main concepts and the practice of managing the financial institutions. The discipline examines the economic, legal, institutional, and other aspects of the finance, and will give detailed description for main approaches and methods.

The aim of the course is to develop a clear understanding of the world finance industry approaches and techniques. Particular emphasis is placed on the role of intermediary, liquidity, failure and other.

Objectives of discipline:

- To describe the main approaches of finance;

- To give an idea and develop understanding of management of financial institutions;

- Compare local and international finance methods and approaches;

- Understand reasons for failure of financial institutions;

This discipline considers and examines the basic concepts, principles, methodology and development of management of financial institutions.

Methods of teaching this discipline provides:

- Lecturing;

- Practical classes conduction;

- IWMT;

- IWM

Prerequisites: Economics, finance, financial management

Postrequisites: master thesis

Upon completion of this discipline postgraduate students must:

master the following competencies according to the competence model of the Master

General competencies:

know: the theoretical foundations of modern management of financial institutions;

be able to: creatively use theoretical knowledge in management of financial institutions and independently apply them in practical sphere;

master the skills: to apply the methods of international finance in practice

Specialized subject:

know: methods and techniques of international finance

be able to: identify the most important distinguishing features of a particular finance operations and its domestic and foreign situation, choose options methods and techniques depending on the specific situation

master the skills: understand the reasons and consequences of the management of financial institutions development

2 THEMATIC PLAN OF THE DISCIPLINE

Management of financial institutions

№	Themes	Contact hours	IWMT	IWM
Total	including
Lecture	Practice	Laboratory
1	2	3	4	5	6	7	8
1	Institutional structure and the main characteristics of the financial system.	18	3	5		2	8
2	The problems of organization of financial institutions	15	3	2	-	2	8
3	The planning at the financial institutions	16	4	2	-	2	8
4	Financial Regulations of the World	13	2	1	-	2	8
5	Risk management if financial institutions	14	3	1	-	2	8
6	Financial institutions in Emerging Economies	10	1	1	-	3	5
	Total	90	15	15		15	45

3 Contents of the discipline

Topic 1: Institutional structure and the main characteristics of the financial system

The financial system and monetary system, and their role in the economy. The structure and content of financial system. The role of the financial institutions in the national economy and its impact on economic growth. Mechanisms of the financial system in the economy. Formation of global credit and financial and finance systems. International financial institutions. Financial flows in the world economy and the role of MBS. Begins with a review of the debate over what constitutes, characterises and causes a financial crisis. Most of the chapter focuses on modern day crises. There is extensive coverage of the South East Asian and Scandinavian financial crises. The ongoing problems with Japan’s financial institutions and financial system are used to illustrate how a financial bubble can expand and burst, this time in the world’s second largest economy. The circumstances surrounding the near collapse of the hedge fund, Long Term Capital Management (LTCM) are reviewed to illustrate how problems in a small non-bank can, some think, threaten the world financial order. In view of intervention by central financial institutions, the IMF and other official bodies, the final section of this chapter looks at the arguments for and against a lender of last resort, and in some quarters, proposals for an international lender of last resort.

Topic 2: The problems of organization of financial institutions

Reviews the diversification into non-bank financial services all over the world, including their role in securitisation. The continued growth of securitisation and derivatives has added new dimensions to financial institutions’ management of financial risk. While financial institutions continue to address issues arising from the traditional asset liability management, off-balance sheet risk management has become at least as important for some financial institutions. Yet only the major financial institutions and some specialist financial institutions use these instruments extensively. For the vast majority of financial institutions, intermediation and liquidity provision remain the principal services on offer. Also, poor asset management continues to be a key cause of bank failure, making credit risk management as important as ever, alongside the management of market, operating and other financial risks.

The financial institutions’ growing reliance on non-interest income by financial institutions. But does diversification increase income and profitability? How should financial institutions react to the development of new financial methods, such as securitisation, instruments such as derivatives, or technology such as the internet with e-cash? International financial markets and the growth of international finance. Attention then turns to the relationship between multinational and wholesale finance and the Japanese and American financial institutions that dominate global markets. What do empirical studies reveal about the factors that explain multinational finance activity? What do financial data for financial institutions’ profitability, asset growth, relative operating expenses and relative share price performance actually imply? Lastly, lecture 2 asks how financial institutions can turn potential threats into opportunities. What is the future for cash? More generally, could IT developments threaten core bank functions or will the 21st century see the end of financial institutions as we know them?

Topic 3. The planning at the financial institutions

Asks what factors govern the competitiveness of financial institutions. The chapter reviews the results of tests on productivity, X-efficiency, economies of scale and scope, and technical progress. The chapter also explores the key competitive issues as they relate to finance markets. Most of the empirical tests focus on the structure–conduct–performance (SCP) hypothesis and relative efficiency models. Other researchers have used empirical models to examine the extent to which finance is a contestable market. Recent work on a generalised pricing model is reviewed. Using this approach, the question is: what variables influence the price setting behaviour of financial institutions with respect to their core products, and is there any evidence of Cournot or other types of behaviour? The final section notes the growing trend in mergers and acquisitions in finance, which was especially pronounced in the 1990s. Some of the extensive empirical literature

The way the financial institutions manages its risk and how it is regulated are increasingly interdependent. Hence, Lecture 3 is followed by two lectures on regulation. Lecture 4 concentrates on international regulation; Lecture 5 covers the structure and regulation of financial institutions in countries with the key financial centres of the developed world. A section on the European Union is also included because of its increasing influence on its members’ structure and regulation.

Topic 4: Financial Regulations of the World

A comprehensive review of the global regulation of financial institutions, signaling the growing importance of international regulations, such as ‘‘Basel 1’’ and ‘‘Basel 2’’. Why are financial institutions singled out for special regulation? Should they be? It also looks at how the enormous increase in global capital flows and the spread of multinational finance has increased the need for the international coordination of prudential regulation. It reviews the logic and content of Basel 1 in 1988, as well as the likely consequences of the new Basel 2. While the Basel Committee’s main concern is with the supervision of international financial institutions, other organizations have focused on international financial stability. The respective roles played by these organizations are reviewed. Lecture 4 concludes with a discussion of the key issues now facing policy makers in the area of financial stability and international bank supervision.

Topic 5: Risk managent of financial institutions

Looks at bank structure and regulation in the UK, USA, Japan and the EU. Regulation can have an important impact on the structure of the finance system in a given country, and vice versa. It begins with the United Kingdom when, in 1997, the newly elected Labour government announced that responsibility for bank supervision was to be transferred from the Bank of England to a single regulator for all financial institutions. To understand the reasons behind this major change, it is necessary to look at the recent history of bank regulation in the UK, which is covered in this section. The idiosyncrasies of the American finance structure are traced to numerous 20th century finance regulations. Over time American financial institutions have been subject to an extensive range of statutes, which govern everything from bank examination and branch finance, to the functional separation of financial institutions. The USA was the first country to introduce deposit protection legislation in 1933. Many of the laws enacted reflect a commitment to discourage collusive behaviour and regulatory capture. The legacy of these laws is a unique finance structure.

Topic 6: Financial institutions in Emerging Economies

Covers finance in emerging markets. They are the source of many financial crises that reverberate around the world. They are also under growing pressure to adopt western regulatory standards. Some developing economies suffer bouts of financial instability; others do not. Foreign financial institutions play an active role in a few developing countries, but they are banned in others. Why, and with what consequences? Why are informal, unregulated financial markets so common? What are the main problems that these countries face? The first section provides a detailed overview of financial repression and reform, with its main focus on Russia, China and India.

4 Themes for practical classes

Topic 1: Institutional structure and the main characteristics of the financial system

Financial flows in the world economy and the role of MBS. Begins with a review of the debate over what constitutes, characterises and causes a financial crisis. Most of the chapter focuses on modern day crises. The circumstances surrounding the near collapse of the hedge fund, Long Term Capital Management (LTCM) are reviewed to illustrate how problems in a small non-bank can, some think, threaten the world financial order.

Topic 2: The problems of organization of financial institutions

Issues arising from the traditional asset liability management, off-balance sheet risk management has become at least as important for some financial institutions. Poor asset management as a key cause of bank failure, making credit risk management as important as ever, alongside the management of market, operating and other financial risks.

Attention then turns to the relationship between multinational and wholesale finance and the Japanese and American financial institutions that dominate global markets. What do empirical studies reveal about the factors that explain multinational finance activity?

Topic 3. The planning at the financial institutions

The key competitive issues as they relate to finance markets. What variables influence the price setting behaviour of financial institutions with respect to their core products, and is there any evidence of Cournot or other types of behaviour? The final section notes the growing trend in mergers and acquisitions in finance, which was especially pronounced in the 1990s. The way the financial institutions manages its risk and how it is regulated are increasingly interdependent.

Topic 4: Financial Regulations of the World

A comprehensive review of the global regulation of financial institutions, signaling the growing importance of international regulations, such as ‘‘Basel 1’’ and ‘‘Basel 2’’. Why are financial institutions singled out for special regulation? Should they be? It also looks at how the enormous increase in global capital flows and the spread of multinational finance has increased the need for the international coordination of prudential regulation.

Topic 5: Risk management of financial institutions

The recent history of financial institutions activity. The idiosyncrasies of the American financial structure are traced to numerous 20th century finance regulations. Over time American financial institutions have been subject to an extensive range of statutes, which govern everything from bank examination and branch finance, to the functional separation of financial institutions. The USA was the first country to introduce deposit protection legislation in 1933. Many of the laws enacted reflect a commitment to discourage collusive behaviour and regulatory capture.

Topic 6: Financial institutions in Emerging Economies

Covers finance in emerging markets. They are the source of many financial crises that reverberate around the world. They are also under growing pressure to adopt western regulatory standards. Some developing economies suffer bouts of financial instability; others do not. Foreign financial institutions play an active role in a few developing countries, but they are banned in others. Why, and with what consequences? Why are informal, unregulated financial markets so common? What are the main problems that these countries face?

5 5 Themes, questions and assignments to fulfill IWM

Lecture 1 Institutional structure and the main characteristics of the financial system

A brief overview of finance structure, using data from the USA, UK and Kazakhstan to illustrate the variation in finance systems. The main organisational forms in finance, such as: universal, commercial, investment, merchant financial institutions, holding companies and financial conglomerates.

The relationship between financial institutions and central financial institutions.

Lecture 2, The problems of organization of financial institutions

How financial institutions can turn potential threats into opportunities. What is the future for cash? More generally, could IT developments threaten core bank functions or will the 21st century see the end of financial institutions as we know them? Why financial institutions exist and the challenges they face.

Lecture 3, The planning at the financial institutions

The instruments of Risk management. The problems of methodology of risk management.

Lecture 4, Financial Regulations of the World

The respective roles played by Basel 1 and 2, the key issues now facing policy makers in the area of financial stability and international bank supervision.

Lecture 5, General features of managerial processes of financial institutions

Four mega finance groups now dominate the Japanese finance system. Will these changes be enough to save it?

The European Union’s single market programme, the role of the European Central Bank and the issue of whether supervision of the EU should remain the responsibility of member states.

Lecture 6, Financial institutions in Emerging Economies

Sovereign and political risk analysis. This section addresses questions such as why do emerging market economies require external finance? What causes some of them, periodically, to default? What is the nature of sovereign risk and how is it linked to and compounded by political risk?

The fundamentals in finance, risk management, regulation, the interaction between regulation and structure, and finance in emerging markets

6 A List of main and additional literature

Main literature

1.  Shelagh Heffernan“Modern finance”, 2009, electronic resource

2.  Murray Rothbard “The mystery of finance” 2008, electronic resource

3.  Jesus Huerta de Soto “Money, bank credit and economic cycles” 2007, electronic resource

4.  Roy C. Smith , Ingo Walter, Gayle DeLong, “Global Finance” 2010, electronic resource

Additional literature

5.  Andrea R. and Andrea S. (2007), Risk Management and Shareholders? Value in Banking. John Wiley & Sons Ltd

6.  Anup S, (2009), Global Financial Crisis. [Online]; Available from: http://www. globalissue. org/article/768/global-financial-crisis. [Accessed 15 August, 2010].

7.  Bajeux-Besnainou, I., and Ogunc, K. (2003), Categorical Thinking in Stock Management: A puzzle? The Journal of Behavioural Finance, 4 (3), 118-120.

8.  Academic articles handed in during semester.