Wolkite University
School of Business

MBA641	 P. LeBel		 
Financial Institutions and Markets 	Fall 2017	
	TTh 10:00-11:30	
Course Description

This course analyzes the structure and functioning of the monetary and financial system.  The component parts and the system as a unit will be examined as they interrelate to affect the economy.  Topics include the commercial banking system, the Federal Reserve System, financial markets, financial intermediaries, determination of the level and structure of interest rates, and contemporary problems, both theoretical and applied, in the are of monetary policy.  

Course Objectives

This course provides a systematic analysis of financial institutions and key issues of monetary policy, with emphasis on the United States economy and applications to the global economy.  The areas to be covered include:  the operational nature of financial markets, the determination of real and money rates of interest, economic models of financial behavior, the interaction of monetary and fiscal policy on the behavior of financial intermediaries, and an examination and assessment of alternative contemporary monetary policy issues.  In examining these topics, one can obtain a clearer understanding of the rationale behind individual and collective financial decisions, and of the underlying nature of monetary policy.  Descriptive, geometric, and quantitative methods are used throughout the course.  Class sessions, which are based on a student’s prior reading of assigned materials, require a significant degree of student participation.  Extensive use is made of the course website, located at:
                                       http://msuweb.montclair.edu/~lebelp
A student who has completed this course is expected to demonstrate a mastery of essential concepts and analytical skills in several key areas. The most important of these areas are:

1.	The organizational and operational structure of financial intermediaries in the United States economy, with particular reference to commercial banks, savings and loan associations, mutual savings banks, life insurance companies, private pension funds, stock investment companies, and credit unions; Particular emphasis is given to the evolution of their present roles, as well as to the impact of recent technological and regulatory change for the future:
2.	The nature of financial decisions, including the use of flow of funds analysis, key rates of interest, with specific allowance for risk preference and uncertainty in the determination of the term structure of interest rates and portfolio choices;
3.	The organization and objectives of the Federal Reserve and other central banking systems in terms of its policy impact on the supply of money and interest rates in the economy; a discussion of the regulatory constraints on nonbanking financial intermediaries and their decision-making;
4.	An analysis of the mechanisms and objectives of fiscal policy and the policy impact of public financial activity on private financial intermediaries and their decision-making;
5.	An overview of macroeconomic theories of income determination, including monetary and fiscal policy as expressed in the classical-neoclassical/monetarist, and Keynesian/Post-Keynesian literature;
6.	An analysis of contemporary economic issues of significance to financial intermediaries and monetary policy choices, including the Phillips curve, economic regulation, rational expectations, and supply-side economic choices;
7.	An examination and assessment of the international dimensions of financial decisions and monetary policy, including the significance of exchange rates, Eurodollars, Eurobonds, Eurocurrency to these choices.

The student’s knowledge in each of the above areas will be tested in a mid-term and final examination, in periodic problem sets, and a in a research project whose conditions are stipulated in this document and within the course website. A student who has successfully mastered both theory and methodological applications in these areas will be well prepared to pursue both direct career experience, as well as continuing study in Economics and/or related fields.

Educational Dimensions of the Strategic Charter Supported by the Course:
Discipline Specific Knowledge and Competencies – Students will acquire knowledge and skills in analyzing fundamental economic issues.  The perspective will vary across individual consumers, firms, and the public sector.  Emphasis in all instances will be on practical applications of basic techniques in economic analysis.
Thinking Skills – Students will use computer spreadsheets to analyze economic conditions relating to market equilibrium under various market structures, taxation, international trade, and income distribution, through both homework assignments and in-class case studies.  In addition, various links to Internet data sites will be used to develop a student’s research and organizational skills.
Communications Skills – Students will make periodic presentations regarding classroom case studies they have completed, as well as to analyze contemporary economic issues.
Change Management – Students will be encouraged to think about how economic factors shape institutional decisions at a social level as well as how it affects personal and professional choices.

Wolkite University
School of Business

MBA641	P. LeBel
Financial Institutions and Markets 	Fall 2017

Syllabus

Text:  Anthony Saunders and Marcia Millon Cornett, Financial Markets and Institutions, 5rd edition.  (New York:  McGraw-Hill Irwin, 2012).  https://kamayanti.files.wordpress.com/2016/09/the-mcgraw-hill_irwin-series-in-finance-insurance-and-real-estate-anthony-saunders-marcia-millon-cornett-financial-markets-and-institutions-mcgraw-hill-education-2011.pdf

www.mhhe.com/sc5e

      Recommended Supplements:
		   The Wall Street Journal
		   The New York Times

		   The Economist

		   Financial Times

Readings on Reserve:

Allen, Franklin, and Douglas Gale (2004), “Financial Intermediaries and Markets”, Econometrica 72:4 (July), pp. 1023-1061.
Allen, Franklin, and Douglas Gale (2000), “Financial Contagion”, Journal of Political Economy, 108:1 (February), pp. 1-33.
Allman,William F.(1985).,”Determining Risks with Statistics – and with Humanity,” Science 85/Baltimore Sun, October 13, 1985, p. 50.
Anderson, Richard G. (2003), “Retail Deposit Sweep Programs:  Issues for Measurement, Modeling and Analysis,” Working Paper 2003-026A, Federal Reserve Bank of St. Louis (September), p. 1-13.
Andritzky, Jochen and Manmoham Singh (2006), “The Pricing of Credit Default Swaps During Distress,” WP/06/254, (Washington, D.C.:  International Monetary Fund, November), pp. 1-25.
Arrow, Kenneth J. (1969), “The Organization of Economic Activity:  Issues Pertinent to the Choice of Market versus Non-Market Activity,” in Mansfield Readings, (437-455).
Banarjee, Abhijit V. (1992).  “A Simple Model of Herd Behavior,” Quarterly Journal of Economics, 107:3 (August), pp. 797-817.
Bansal,Ravi and Amir Yaron (2004), “Risks for the Long Run:  A Potential Resolution of Asset Pricing Puzzles,” Journal of Finance, 59:4 (August), pp. 1481-1509.
Barth, James R. (1999), “The S&L Crisis, 10 Years Later:  Government Errors Caused the Problems and They Still Do,” The Milken Institute Review (September), pp. 1-2.
Basurto, Miguel A. Segoviano and Pablo Padilla (2006), “Portfolio Credit Risk and Macroeconomic Shocks:  Applications to Stress Testing Under Data-Restricted Environments,” WP/06/283, (Washington, D.C.:  International Monetary Fund, December), pp. 1-52.
Basurto, Miguel A. Segoviano, Charles Goodhart, and Boris Hofmann (2006), “Default, Credit Growth, and Asset Prices,” WP/06/223, (Washington, D.C.:  International Monetary Fund, September), pp. 1-44.
Bator, Francis M. (1958).  “The Anatomy of Market Failure,” Quarterly Journal of Economics 72:3 (August), pp. 351-379.
Bertaut, Carol C., William L. Griever, and Ralph W. Tryon (2004), “Understanding U.S. Cross-Border Securities Data,” Federal Reserve Bank of New York Quarterly Review (Winter), pp. A59-A75
Bikhchandani, Sushil, David Hirshleifer, and Ivo Welch (1992), “A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades,” Journal of Political Economy, 100:5 (October), pp. 992-1026.
Blanchard, Olivier (2008), “The Tasks Ahead,” Working Paper 08/262, International Monetary Fund (November), pp. 1-10.
Bond, Philip (2004), “Bank and Nonbank Financial Intermediation,” Journal of Finance, 59:6 (December), pp. 2489-2529.
Brunnermeier, Markus K. and Stefan Nagel (2004) “Hedge Funds and the Technology Bubble”, Journal of Finance, 59:5 (October), pp. 2013-2040.
Chambers, Matthew S., Carlos Garriga, and Don Schlagenhauf (2008), “Mortgage Innovation, Mortgage Choice, and Housing Decisions,” Federal Reserve Bank of St. Louis Review, 90:6 (November/December), 585-608).
Chan-Lau, Jorge A., Srobona Mitra, and Li Lian Ong (2007), “Contagion Risk in the International Banking System and Implications for London as a Global Financial Center,” WP/07/74, (Washington, D.C.:  International Monetary Fund), pp. 1-48.
Cicchetti, Stephen G., Rita S. Chu, and Charles Steindel (2000), “The Unreliability of Inflation Indicators,” Current Issues in Economics and Finance, Federal Reserve Bank of New York (April), pp. 1-6.
Cipriani, Marco and Antonio Guarino (2005), “Herd Behavior in a Laboratory Financial Market,” American Economic Review, 95:5 (December), pp. 1427-1443.
Coase, Ronald H. (1960),  “The Problem of Social Cost”, Journal of Law and Economics  (October), pp. 1-44.
Congressional Budget Office (1994), “The Changing Business of Banking:  A Study of Failed Banks from 1987 to 1992,” (Washington, D.C.:  U.S. Congressional Budget Office, June), pp. 1-88.
Conlisk, John (1996).  “Why Bounded Rationality?”  Journal of Economic Literature XXIV:2 (June 1996), pp. 669-700. 
Coughlin, Cletus, K. Alec Chrystal, and Geoffrey E. Wood (1988), “Protectionist Trade Policies:  A Survey of Theory, Evidence and Rationale,” Federal Reserve Bank of St. Louis (January/February), pp. 12-30.
Das, Udaibir S., Michael G. Papaioannou, and Magdalena Polan (2008), “Strategic Considerations for First-Time Sovereign Bond Issuers,” WP/08/261, (Washington, D.C.:  International Monetary Fund), pp, 1-29.
Defwenberg, Martin, Tobias Lindqvist, and Evan Moore (2005), “Bubbles and Experience:  An Experiment,” American Economic Review, 95:5 (December), pp. 1731-1737.
Dixit, Avinash, and Robert Pindyck (1994), Investment Under Uncertainty (Princeton, NJ:  Princeton University Press).
Duca, John V. (2001), “The Democratization of America’s Capital Markets,” Economic and Financial Review, Federal Reserve Bank of Dallas (second quarter), pp. 10-19.
Edwards, Franklin R. and Frederic S. Mishkin (1995), “The Decline of Traditional Banking:  Implications for Stability and Regulatory Policy,” Economic Policy Review, Federal Reserve Bank of New York (July), pp. 27-45.
Einarrson, Tor and Milton H. Marquis (2002), “Banks, Bonds, and the Liquidty Effect,” Economic Review, Federal Reserve Bank of San Francisco, pp. 35-50.
Engel, Charles (2001), “Optimal Exchange Rate Policy:  The Influence of Price Setting and Asset Markets,” Journal of Money, Credit and Banking, 33:2, pt. 2 (May), pp. 518-541.
Estrella, Arturo, and Mary R. Trubin (2006), “The Yield Curve as a Leading Indicator:  Some Practical Issues,” Current Issues, Federal Reserve Bank of New York (July/August), pp. 1-8.
Eubanks, Walter W. (2004), “The Condition of the Banking Industry,” CRS Report RL32542, (Washington, D.C.:  Congressional Research Service, August 24), pp. 1-12.
Federal Reserve Board of Governors (2008), “Flow of Funds Accounts of the United States,” third quarter 2008.  (Washington, D.C.:  Federal Reserve Bank), pp. 1-124.
Friedman, Milton (1970), “A Theoretical Framework for Monetary Analysis,” Journal of Political Economy, 78:2 (March-April), pp. 193-238.
Friedman, Milton and Leonard J.Savage (1948), “The Utility Analysis of Choices Involving Risk,” Journal of Political Economy I 56:4 (August), 279-304).
Hayford, Marc D. and A.G. Malliaris (2005), “Recent Monetary Policy in the U.S.:  Risk management of Asset Bubbles,” SSRN.
Holmstrom, Bengt, and John Roberts (1998).  “The Boundaries of the Firm Revisited,” Journal of Economic Perspectives 12:4 (Fall), pp.  73-94.
Jeanne, Olivier, and Romain Ranière (2006), “The Optimal Level of International Reserves for Emerging Market Countries:  Formulas and Applications,” WP/06/229, (Washington, D.C.:  International Monetary Fund, October), pp. 1-35.
Kahn, Charles and Andrew Winton (2004), “Moral Hazard and Optimal Subsidiary Structure for Financial Institutions,” Journal of Finance, 59:6 (December), pp. 2531-2575.
Kambhu, John, Til Schuermann, and Kevin J. Stiroh (2007), “Hedge Funds, Financial Intermediation, and Systemic Risk,” Economic Policy Review, Federal Reserve Bank of New York, pp. 1-18.
Keeton, William R. (2001), “The Transformation of Banking and Its Impact on Consumers and Small Businesses,” Economic Review, Federal Reserve Bank of Kansas City (winter), pp. 1-29.
Kessing, Sebastian G., Kai A. Konrad, and Christos Kotsogiannis (2007), “Foreign Direct Investment and the Dark Side of Decentralization,” Economic Policy  (January), pp. 5-70.
LeBel, Phillip (2000).  “Asset Bubbles and Moral Hazard:  Evidence from Japan,” Paper presented at the Third International Conference on Global Business and Economic Development, Beijing, China (June), pp. 1-27.
McCandless, George T., and Warren E. Weber (1995), “Some Monetary Facts,” Quarterly Review, Federal Reserve Bank of Minneapolis, 19:3 (summer), pp. 2-11.
Merton, Robert C. (1998), “Applications of Option-PricingTheory:  Twenty-Five Years Later,” American Economic Review, 88:3 (June), pp. 323-349.
Morgan, Donald P., Benjamim Iverson, and Matthew Botsch (2008), “Seismic Effects of the Bankruptcy Reform,” Staff Report No. 358, Federal Reserve Bank of New York (November), pp. 1-30.
Pappaioannou, Michael (2006), “Exchange Rate Risk Measurement and Management:  Issues and Approaches for Firms,” WP/06/255, (Washington, D.C.:  International Monetary Fund, November), pp. 1-22.
Poole,William (2007), “The GSEs:  Where Do We Stand?” Federal Reserve Bank of St. Louis Review (May/June), pp. 143-151.
Quartner, David (2006), “Public Choice theory, Protectionism, and The Case of NAFTA,” Institute of Economic Affairs, pp. 1-2.
Ramsey, Frank P. (1927), “A Contribution to the Theory of Taxation,” The Economic Journal 37:145 (March), 47-61.
Samuelson, William (1984), “Bargaining Under Asymmetric Information,” Econometrica 52:4 (July): 995-1007.
Simon, Herbert A.,  “Theories of Decision-Making in Economics and Behavioral Science”, American Economic Review (1959).
Stiglitz, Joseph E., “The Causes and Consequence of the Dependence of Quality on Price,” Journal of Economic Literature 25 (March 1987): 1-48.
Wallison, Peter J. (2008), “Systemic Risk and the Financial Crisis”, AEI Policy Paper, (Washington, D.C.:  AEI, October), pp. 1-5.
Wheelock, David C. (2008), “Changing the Rules:  State Mortgage Foreclosure Moratoria During the Great Depression,” Federal Reserve Bank of St. Louis Review, 90:6 (November/December), 569-584.
Wheelock, David C. (2008), “The Federal Response to Home Mortgage Distress:  Lessons from the Great Depression,” Federal Reserve Bank of St. Louis Review, 90:3, pt. 1 (May/June), pp. 133-148.
White, Lawrence, J. (2005), “On Truly Privatizing Fannie Mae and Freddie Mac:  Why It’s Important, and How to Do It,” University of Pennsylvania Conference Paper, June 2005.

	All class sessions are based on the student's prior reading of assigned material.  Class sessions contain basic text reading assignments, key terminology with some web links, readings on reserve, application modules, data sets, and classroom case studies.  Exceptions to optional reserve readings will be announced by the instructor.
***

I.	 	The Organizational and Policy Structure of Financial Institutions
Class  1 (10/3/17) – Monetary Institutions in a Macroeconomic Setting
Text:  Saunders, pp. 1-61: Why Are Financial Intermediaries Special; The Financial Services Industry: Depository institutions; The Financial Services Industry – Insurance Companies
	Key Terms: Primary vs. Secondary markets, money markets, capital markets, foreign exchange markets, derivative markets, initial public offering (IPO), Over-The-Counter (OTC) money markets, Treasury bills, federal funds, repurchase agreements, commercial paper, negotiable certificates of deposit, banker’s acceptances, mortgages, Treasury securities, foreign exchange risk, swaps, mortgage backed securities (MBO’s), subprime mortgages, (SEC) Securities and Exchange Commission (1934), commercial and savings banks, credit unions, insurance companies, mutual funds, hedge funds, liquidity, price risk, monitoring, agency costs, economies of scale, e-trading, Federal Deposit Insurance Corporation(FDIC), Financial Services Modernization Act (FSM, 1999), Glass-Steagall Act (1933), adjustable rate mortgages (ARM), London Interbank Bank Offer Rate (LIBOR), FSLIC, SIPC, Community Reinvestment Act of 1975 (CRA), Home Mortgage Disclosure Act (HMDA), Federal Financial Institutions Examination Council (FFIEC), Comptroller of the Currency, Money market mutual funds (MMMF’s), NOW accounts, Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), Garn-St. Germain Depository Institutions Act of 1982 (DIA), Competitive Equality in Banking Act of 1987 (CEBA), Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA), Federal Deposit Insurance corporation Improvement Act of 1991 (FDICIA), Riegle-Neal Interstate Banking and Branching Efficient Act of 1994, Financial Services Modernization Act of 1999, Sarbanes-Oxley Act of 2002, net interest margin, disintermediation, Regulation Q ceiling, regulatory forbearance,
Datasets: Global Data; Bills, Bonds, Stocks, Inflation; Bond Market Profile; U.S. Futures and Options Markets;
Application Modules: Economic Functions of the Public Sector, The Measurement of Risk; Basic Forecasting
 Classroom case studies: The Equation Of Exchange; The Harrod-Domar Growth Model
 Course Optional Reserve Readings: (1) Federal Reserve Board of Governors (2008), “Flow of Funds Accounts of the United States,” third quarter 2008.  (Washington, D.C.:  Federal Reserve Bank), pp. 1-124; (2) Richard G. Anderson (2003), “Retail Deposit Sweep Programs:  Issues for Measurement, Modeling and Analysis,” Federal Reserve Bank of St. Louis Working Paper 2003-026A, pp. 1-13; (3) Stephen G. Cecchetti, Rita S. Chu, and Charles Steindel (2000), “The Unreliability of Inflation Indicators,” Current Issues in Economics and Finance, Federal Reserve Bank of New York (April), p. 1-6; (4) Miguel A. Segoviano Basurto, Charles Goodhart, and Boris Hofmann (2006), “Default, Credit Growth, and Asset Prices,” WP/06/223, (Washington, D.C.:  International Monetary Fund, September), pp. 1-44; (5) Franklin Allen and Douglas Gale (2004), “Financial Intermediaries and Markets”, Econometrica 72:4 (July), pp. 1023-1061; (6) George T. McCandless, Jr., and Warren E. Weber (1995), “Some Monetary Facts,” Quarterly Review, Federal Reserve Bank of Minneapolis 19:3 (Summer), pp. 2-11;  (7) Francis M. Bator (1958), "The Anatomy of Market Failure", Quarterly Journal of Economics 72:3 (August), pp. 351-379.

Class  2 (10/5/17) –  Interest Rate Determination: 
                                  The Term Structure of Interest Rates
Text:  Saunders, pp. 62-130: The Loanable Funds Theory, Liquidity Premium Theory, Market Segmentation Theory; Risks of Financial Intermediation.
Key Terms: Present Value, Future Value, Coupon Rate, Required Rate of Return, Efficient Markets Hypothesis, Time Remaining to Maturity, Duration
Datasets: Measuring Inflation adjustments to Nominal and Real Indicators
Application Modules: Fundamentals of Finance; Optimal Investment Storage Decisions; Exhaustible Resource Model; The Cobweb Model; 
Classroom case studies: The Money Multiplier Model; Macroeconomic Equilibrium  
Course Optional Reserve Readings: (1) Milton Friedman (1970), “A Theoretical Framework for Monetary Analysis,” Journal of Political Economy, 78:2 (March-April), pp. 193-238; (2) Arturo Estrella and Mary R. Trubin (2006), “The Yield Curve as a Leading Indicator:  Some Practical Issues,” Current Issues, Federal Reserve Bank of New York (July/August), pp. 1-8; (3) Peter J. Wallison (2008), “Systemic Risk and the Financial Crisis,” (Washington, D.C.: American Enterprise Institute, (October), pp. 1-5; (4) Walter W. Eubanks (2004), “The Condition of the Banking Industry”, CRS Report RL32542, (Washington, D.C.:  CRS, August 24), pp. 1-12;

II.	Financial Institutions and Monetary Dynamics
Class  3 (10/10/17) -   Duration, Immunization, and Convexity 
in Financial Assets; The Federal Reserve System, Monetary 
Policy, and Interest Rates
	Text:  Saunders, pp. 130-199
Key Terms: Durability and convexity, cumulative gap between book value of assets and maturity based liabilities (CGAP), Office of the Comptroller of the Currency (OCC), Federal Reserve System (FRS), Federal Open Market Committee (FOMC), open market operations, the discount rate, the federal funds rate, 2010 Wall Street Reform and Consumer Protection Act, Treasury bills, Federal funds, Repurchase agreements, Commercial paper, negotiable certificates of deposit, Banker’s acceptances, Treasury bill auctions, 
Datasets:
Application Modules:  
Classroom case studies: Loanable Funds Model; The IS-LM Model
Course Optional Reserve Readings: (1) Franklin R. Edwards and Frederic S. Mishkin (1995), “The Decline of Traditional Banking:  Implications for Financial Stability and Regulatory Policy,” Economic Policy Review, Federal Reserve Bank of New York (July), pp. 27-45; (2) David C. Wheelock (2008), “The Federal Response to Home Mortgage Distress:  Lessons from the Great Depression,” Federal Reserve Bank of St. Louis Review, 90:3, pt. 1 (May/June), pp. 133-148; (3) David C. Wheelock (2008), “Changing the Rules:  State Mortgage Foreclosure Moratoria During the Great Depression,” Federal Reserve Bank of St. Louis Review, 90:6 (November/December), pp. 569-583; (4) Tor Einarsson and Milton H. Marquis (200), “Banks, Bonds, and the Liqudity Effect,” Economic Review, Federal Reserve Bank of San Francisco, pp. 35-50; (5)  (James R. Barth (1999), “The S&L Crisis, 10 Years Later: Government Errors Caused the Problems and They Still Do,” The Milken Institute Review (September), pp. 1-2; (6) Congressional Budget Office (1994), “The Changing Business of Banking:  A Study of Failed Banks from 1987 to 1992,” (Washington, D.C.:  Congressional Budget Office, June), pp. 1-88; (7) Matthew S. Chambers, Carlos Garriga, and Don Schlagenhauf (2008), “Mortgage Innovation, Mortgage Choice, and Housing Decisions,” Federal Reserve Bank of St. Louis Review, 90:6 (November/December), 585-608).
Research Paper Topic Selection Deadline

Class  4 (10/12/17)- Treasury and Bond Markets, Municipal Bonds, and 
Municipal Bonds
	Text:  Saunders, pp. 199-269: 
Key Terms: International financial transactions markets, LIBOR, Too Big To Fail (TBTF), Single vs. Discriminating price Treasury Auctions, Creation of a Banker’s Acceptance, Bond Market Securities, Treasury Notes and Bonds, Separate Trading of Registered Interest and Principal Securities (STRIPS), Treasury Investment Growth Receipts (TIGR’s), Accrued Interest, STRIP Immunization, Treasury Inflation Protection Securities (TIPS), Muni Bonds, General Obligation bonds (GO), Revenue Bonds, Firm Commitment Underwriting, Best-Efforts Offering, Private Placement, Corporate Bonds, bond indenture, Bearer bonds, Registered bonds, Term versus Serial Bonds, Mortgage bonds, Equipment Trust Certificates, Debentures, Subordinated Debentures, Convertible bonds, Stock warrants, Callable bonds, Sinking Fund Provisions, Bond ratings, Junk bonds, Eurobonds, Sovereign bonds, 
Datasets:
Application Modules: The CAPM Model; Value at Risk Models; Risk and Pension Reform
Classroom case studies: Financial Analysis; The Millet Mill Case Study; The Am Djena Case Study
Course Optional Reserve Readings: (1) John Kambhu,Til Schuermann, and Kevin J. Stiroh (2007), “Hedge Funds, Financial Intermediation, and Systemic Risk,” Economic Policy Review, Federal Reserve Bank of New York (December), pp. 1-18; (2) Philip Bond (2004), “Bank and Nonbank Financial Intermediation,” The Journal of Finance, 59:6 (December), pp. 2489-2529; (3) Donald P. Morgan, Benjamin Iverson, and Matthew Botsch (2008), “Seismic Effects of the Bankruptcy Reform,” Staff Report No. 358, Federal Reserve Bank of New York (November), pp. 1-30; (4) Miguel A. Segoviano Basurto and Pablo Padilla (2006), “Portfolio Credit Risk and Macroeconomic Shocks:  Applications to Stress Testing Under Data-Restricted Environments,” WP/06/283, (Washington, D.C.:  International Monetary Fund, December), pp. 1-52; (5) William Poole (2007), “The GSEs:  Where Do We Stand?”, Federal Reserve Bank of St. Louis Review, (May/June), pp. 143-152.
(No class on December 26, 2009 or on January 2, 2010)

III.	Financial Institutions and Risk Diversification
Class 5 (10/17/17) -  Mortgage Markets, Stock Markets
	Text: Saunders, pp. 269-338: 
 Key Terms: primary mortgages, collateral, private mortgage insurance, insured vs. conventional mortgages, mortgage maturities, fixed vs. balloon mortgages, fixed vs. adjustable rate mortgages (ARM), Discount points, sub-prime mortgages, Alt-A mortgages, Option ARM, Minimum payment option, Interest-only payment, 30yr fully amortizing payment, 15 year fully amortizing payment, second mortgage, home equity loan, reverse annuity mortgage (RAM), secondary mortgage, Federal National Mortgage Association (FNMA, “Fannie Mae”), Veteran Administration (VA), Government National Mortgage Association (GNMA, “Ginnie Mae), correspondent banking, mortgage-backed securities, collateralized mortgage obligation (CMO), pass-through mortgage securities, Federal Home Loan Mortgage Corporation (FHLMC, “Freddie Mac”), Federal National Mortgage Association (FNMA), Collateralized Mortgage Obligation (CMO), Mortgage-backed bonds (MBB’s), Common stock, dividends, residual claim, limited liability, cumulative vs. straight voting, preferred stock, cumulative preferred stock, primary vs. secondary stock markets, underwriters spread as difference between net and gross proceeds, originating houses, initial public offering (IPO), pre-emptive rights, secondary stock vs. primary stock markets, National Association of Securities Dealers Automated Quotation (NASDAQ, 1971), Wilshire (1974), New York Stock Exchange (NYSE), American Stock Exchange (Amex), market order vs. limit order, program trading, flash trading, naked access, dark pools of liquidity, Price-Earnings (P/E) Ratio, Small Order Execution System (SOES), alternative trading system (ATS), electronic communications network (ECN), stock market indexes, weak vs. strong form financial market efficiency, Securities and Exchange Commission (1934), Sarbanes-Oxley Act of 2002, Financial Industry Regulatory Authority (FINRA, 2007), American Depository Receipt (ADR), 
Datasets: Stock Market Bubbles
Application Modules: The Basic Option Price Model; Economic Value Added Models; the Merton Risk Premium Model; 
Classroom case studies: 
Course Optional Reserve Readings: (1) Congressional Budget Office (2008), “The Economic Recovery Act of 2008,” (Washington, D.C.:  Congressional Budget Office, November), pp. 1-8; (2) Brunnermeier, Markus K. and Stefan Nagel (2004) “Hedge Funds and the Technology Bubble”, Journal of Finance, 59:5 (October), pp. 2013-2040; (3) Charles Kahn and Andrew Winton (2004), “Moral Hazard and Optimal Subsidiary Structure for Financial Institutions,” Journal of Finance, 59:6 (December), pp. 2531-2575; (4) Manuel S.Santos and Michael Woodford (1997), “Rational Asset Pricing Bubbles,” Econometrica 65:1 (January), pp. 19-57; (5) Nobuhiro Kiyotaki and John Moore (1997), “Credit Cycles,” Journal of Political Economy 105:2 (April), pp. 211-248; (6) Jochen Andritzky and Manmohan Singh (2006), “The Pricing of Credit Default Swaps During Distress,” IMF paper WP/06/254, (Washington, D.C.:  International Monetary Fund, November), pp. 1-25); (7) Daniel Kahneman and Amos Tversky (1979), "Prospect Theory: An Analysis of Decision Under Risk," Econometrica 47-2(March), 263-292; (8) Daniel Bernoulli (1954, 1738), "Exposition of a New Theory on the Measurement of Risk, Econometrica 22:1 (January), 23-36; 

Class  6 (10/19/17) – Managing Financial Portfolios, Foreign Exchange 
Markets, Balance of Payments Accounts, Derivative Securities 
Markets
Text:  Saunders, pp. 338-407: 
Key Terms: The Capital-Asset Pricing Model (CAPM), Foreign Exchange (FX) markets, foreign exchange rate (FOREX), Bretton Woods Agreement of 1944, Smithsonian Agreement of 1971, Smithsonian Agreement of 1973, International Money Market (IMM), Chicago Mercantile Exchange (CME), the euro (January 1, 1999), dollarization, free floating yuan (July 21, 2005), spot vs. forward forex market, hedging foreign exchange risk, net long short, purchasing power parity (PPP), the law of one price, the Big Mac Index, Interest Rate Parity Theorem (IRPT), derivative securities market, forward market contract, marked to market contract, Chicago Board of Trade (CBT), Commodities Futures Trading Commission (CFTC), open-outcry auction method, open interest, long vs. short position, scalpers, floor broker, day trader, professional trader, position trader, margin requirements – initial and maintenance, call option, put option, American vs. European options, intrinsic value of an option, time value of an option, swaps, interest rate swaps, credit swaps, InterContinental Exchange (ICE), call option with multiple prices (cap), floor and ceiling option cap as a collar, Black-Scholes Option Pricing Model,
Datasets: Risk-Based Capital Ratios; 
Application Modules: Expected Default Frequency Models; 
Classroom case studies:
Course Optional Reserve Readings: (1) Lawrence J. White (2005), “On Truly Privatizing Fannie Mae and Freddie Mac:  Why It’s Important, and How to Do It,” paper presented at the Conference on Fixing the Housing Finance System, Wharton School, University of Pennsylvania, June 13, pp. 1-25. (2) Ravi Bansal and Amir Yaron (2004), “Risks for the Long Run:  A Potential Resolution of Asset Pricing Puzzles,” Journal of Finance, 59:4 (August), pp. 1481-1509; (3) Robert C. Merton (1998), “Applications of Option-Pricing Theory:  Twenty-Five Years Later,” American Economic Review, 88:3 (June), pp. 323-349; (4) William R. Keeton (2001), “The Transformation of Banking and Its Impact on Consumers and Small Businesses,” Economic Review, Federal Reserve Bank of Kansas City (winter), pp. 1-29).
Research Paper Preliminary Bibliography Submission Deadline

		   Class 7 (10/24/17)	Mid-Term Examination

IV.	Commercial Banking
Class  8 (10/26/17) -  Commercial Banks, Commercial Bank’s Financial Statements Analysis, Regulation of Commercial Banks
Text:  Saunders, pp. 408-476
Key Terms: Commercial vs. nonfinancial bank balance sheets, NOW accounts, transaction accounts, negotiable cd’s, Troubled Asset Relief Program (TARP, 2009), off-balance sheet asset, off-balance sheet liability, community bank, retail banking, wholesale banking, regional or super-regional bank, federal funds market, money center bank, interest rate spread, net interest margin, return on assets (ROA), return on equity (ROE), noncurrent loans, Federal Deposit Insurance Corporation (FDIC, 1933), Office of the Comptroller of the Currency (OCC, 1863), Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDRCA), dual banking system, Federal Reserve System (FRS), Information/Monitoring Costs, Nationalization/Expropriation, Fixed Costs, Uniform Financial institutions Rating System (UFIRS, 1979), CapitalAdequacy/AssetQuality/Management/Earnings/Liquidity/SensitivityToRisk (CAMELS), net write-offs, earning assets, money market deposit accounts (MMDA’s), retail cd’s, wholesale cd’s, negotiable instrument, brokered deposits, core deposits, purchased funds, loan commitment, up-front fee, commitment fee, correspondent banking, taxable equivalent interest income, total operating income, asset utilization, return on equity, return on assets, equity multiplier, decomposition of asset utilization, net interest margin, outside vs. inside money, qualified thrift lender (QTL), Community Reinvestment Act (CRA, 1977), Home Mortgage Disclosure Act (HMDL, 1975), Consumer Financial Protection Agency (CFPA, 2010), universal financial institution (UFI), Financial Services Modernization Act (FSMA, 1999), nonbank bank (NBB)
Datasets: Stock Market Valuation; 
Application Modules: 
Classroom case studies: Commodity Stabilization Models
Course Optional Reserve Readings: (1) Abhijit V. Banerjee (1992), “A Simple Model of Herd Behavior”, Quarterly Journal of Economics, 107:3 (August), pp. 797-817; (2) Sushil Bikhchandani, David Hirshleifer, and Ivo Welch (1992), “A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades”, Journal of Political Economy, 100:5 (October), pp. 992-1026; (3) Marco Cipriani and Antonio Guarino (2005), “Herd Behavior in a Laboratory Financial Market,” American Economic Review, 95:5 (December), pp. 1427-1443; (4) Martin Defwenberg, Tobias Lindqvist, and Evan Moore (2005), “Bubbles and Experience:  An Experiment,” American Economic Review, 95:5 (December), pp. 1731-1737.
Research Paper Outline and Revised Bibliography Submission Deadline

Class  9 (10/31/17) -   Commercial Banking Regulation, Other Lending 
Institutions, Savings Banks, Credit Unions
	Text:  Saunders, pp. 476-542
Key Terms: unit vs. branch banks, McFadden Act of 1927, multi-bank holding companies (MBHC), Douglas Amendment of 1956, one-bank holding company (OBHC), Riegle-Neal Interstate Banking and Branching Efficiency Act (RNIBBEA, 1994), disintermediation, Federal Savings and Loan Insurance Corporation (FSLIC, 1934-1989), Financial Institutions Reform Recovery and Enforcement Act (FIRREA, 1989), Savings Association Insurance Fund (SAIF, 1989), Bank Insurance Fund (BIF), Federal Deposit Insurance Reform Act (FDIRA, 2005), prompt corrective action (PCA), Basel Accord I (1993), Basel Accord II (1998, 2006), internal ratings based regulation (IRB), Overseas Direct Investment Control Act (1964), North American Free Trade Agreement (1994), Foreign Bank Supervision Enhancement Act (FBSEA, 1991), counterparty credit risk, Regulation Q (-1986), Depository Institutions Deregulation and Monetary Control Act (DIDMCA, 1980), Garn-St. Germain Depository Institutions Act (GSGDIA, 1982), money market deposit accounts (MMDA’s), regulatory forbearance, Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA, 1989), qualified thrift lender (QTL) test, Office of Thrift Supervision (OTS), National Credit Union Administration(NCUA), 
National Credit Union Insurance Fund (NCUSIF), Federal Deposit Insurance Reform Act (2005), Sales Finance Institutions, Personal Credit Institutions, Business Credit Institutions, Captive Finance Company, Sub-Prime Lender, Loan Shark, Home Equity Loans, Securitized Mortgage Assets, 
Datasets:
Application Modules: Random Walk Modeling; Efficient Portfolios; 
Classroom case studies:
Course Optional Reserve Readings: (1) Marc D. Hayford and A.G. Malliaris (2005), “Recent Monetary Policy in the U.S.:  Risk Management of Asset Bubbles,” SSRN Paper, pp. 1-16; (2) Franklin Allen and Douglas Gale (2000), “Financial Contagion”, Journal of Political Economy, 108:1 (February), pp. 1-33; (3) Ronald H. Coase (1960),  “The Problem of Social Cost”, Journal of Law and Economics  (October), pp. 1-44; (4) Phillip LeBel (2000), “Asset Bubbles and Moral Hazard:  Evidence from Japan,” paper presented at the Third Conference on Global Business and Economic Development, Beijing, China, (June), pp. 1-19.
Research Paper Submission Deadline

V.	Insurance Institutions
Class  10 (11/02/17) -   Insurance Companies, Securities Firms and 
Investment Banks, Mutual Funds
	Text:  Saunders, pp. 543-615
Key Terms: Credit Default Swaps (CDS), Life Insurance, Adverse Selection, Moral Hazard, Term Life, Whole Life, Endowment Life, Variable Life, Universal Life and Variable Universal Life, Group Life, Credit Life, Annuity, Private Pension Funds, Accident and Health Insurance, policy loans, policy reserves, surrender value of a policy, annuity separate account, McCarran-Ferguson Act of 1945,  property-casualty insurance companies, fire insurance and allied lines, homeowners multiple peril (MP), commercial multiple peril insurance, automobile liability and physical damage (PD), liability insurance other than auto, probability vs. severity of loss, long vs. short tail liability, reinsurance, measuring loss risk, operating ratio, underwriting cycle, discount broker, venture capital, institutional venture capital firms, cash management accounts, Financial Industry Regulatory Authority (FINRA), mutual funds (1924), equity funds, bond funds, hybrid funds, money market mutual funds (MMMF’s), Exchange Traded Funds (ETF), SPDR’s, Vanguard Large-Cap VIPERS funds, Net Asset Value (NAV), closed vs. open-end funds, real estate investment trusts (REIT’s), load vs. no-load funds, 
Datasets: East Europe Per Capita GDP 1997, Economic Freedom and Corruption, 2001 Corruption Perceptions Index; U.S. Budget and Trade Balances; 
Application Modules: Working Capital Management; 
Classroom case studies:
Course Optional Reserve Readings: (1) Jorge A. Chan-Lau, Srobona Mitra, and Li Lian Ong (2007), “Contagion risk in the International Banking System and Implications for London as a Global Financial Center,” Working Paper 07/74, (Washington, D.C.:  International Monetary Fund), pp. 1-48; (2) Carol C. Bertaut, William Griever, and Ralph W. Tryon (2004), “Understanding U.S. Cross-Border Securities Data,” Federal Reserve Bank of New York Quarterly Review (Winter), pp. A59:A75; (3) Charles Engel (2001), “Optimal Exchange Rate Policy:  The Influence of Price Setting and Asset Markets,” Journal of Money, Credit, and Banking, 33:2, pt. 2 (May), pp. 518-541; (4) Udaibir S. Das, Michael G. Papaioannou, and Magdalena Polan (2008), “Strategic Considerations for First-Tie Sovereign Bond Issuers,” WP/08/261, (Washington, D.C.:  International Monetary Fund, November), pp. 1-29; (5) Michael Papaioannou (2006), “Exchange Rate Risk Measurement and Management:  Issues and Approaches for Firms,” WP/06/255, (International Monetary Fund, November), pp. 1-22; (6) Olivier Jeanne and Romain Rancière (2006), “The Optimal Level of International Reserves for Emerging Market Countries:  Formulas and Applications,” WP/06/229, (Washington, D.C.:  International Monetary Fund, October), pp. 1-35; (7) Sebastian G. Kessing, Kai A. Konrad and Christos Kotsogiannis (2007), “Foreign Direct Investment and The Dark Side of Decentralization,” Economic Policy (January), pp. 6-70; (8) Daron Acemoglu and Thierry Verdier (2000), "The  Choice Between Market Failures and Corruption," American Economic Review, 90:1 (March), 194-211; (9) David Quartner (2006), “Public Choice Theory, Protectionism, and the Case of NAFTA,” Economic Issues, Institute of Economic Affairs, pp. 1-2; 

Class 11 (11/07/17)-  Hedge Funds, Pension Funds, Types of Risks Incurred by 
Financial Institutions
Text:  Saunders, pp. 615-684
Key Terms:  LTCM, risk aversion, management vs. performance fees, offshore hedge funds, Wall Street Reform and Consumer Protection Act (2010), Investment Advisors Act, Financial Stability Oversight Council, Private vs. public pension funds, defined benefit vs. defined contribution pensions, flat benefits formula, Defined benefit Fund Using Career Average Formula, final pay formula, fully funded pension fund, defined contribution pension fund, insured vs. uninsured pension funds, public vs. private pension funds, individual retirement account (IRA), Roth IRA (1998), Keogh account, Employee Retirement Income Security Act (ERISA, 1974), vested employee pension, fiduciary responsibilities, Pension Benefit Guarantee Corporation (PBGC, 1974), Charge-off rates, commercial and industrial loans (C&I), Bankruptcy Reform Act (October 2005), firm-specific credit risk, systemic risk, refinancing risk, price risk, off-balance-sheet-risks, letter of credit, foreign exchange risk, sovereign risk, technology risk, operational risk, insolvency risk, gross debt service ratio (GDS), total debt service (TDS), credit scoring system, FICO score, perfecting collateral, foreclosure, power of sale, Earnings before interest and taxes=operating profit (EBIT), earnings after taxes (EAT), accelerated cost recovery method (ACRS), KMV credit default risk model, 
Datasets: U.S. Balance of Payments; The U.S. Personal Savings Rate; 
Application Modules: 
Classroom case studies:
Course Optional Reserve Readings:  (1) John V. Duca (2001), “The Democratization of America’s Capital Markets,” Economic and Financial Review, Federal Reserve Bank of Dallas (second quarter), pp. 10-19; (2) Olivier Blanchard (2008), “The Tasks Ahead,” Working Paper 08/262, International Monetary Fund, (November), pp. 3-10; (3) Seymour Martin Lipset (1959), “Some Social Requisites of Democracy:  Economic Development and Political Legitimacy,” The American Political Science Review, 53:1 (March), pp. 69-105.

Class 12 (11/09/17) -	Rates of Returns on Loans,
Text, Saunders, 684-751 
Key Terms: Return on Assets, London Interbank Loan Overnight Rate (LIBOR), prime lending rate, compensating balances, Federal Reserve Required Reserve Ratio (RRR), risk-adjusted return on capital (RAROC), Portfolio management, portfolio diversification, liquidity coverage ratio (LCR), net stable funding ratio (NSF), fire-sale prices, core deposits, net deposit drain, depository institution (DI), purchased liquidity management, stored liquidity management, liquidity index, bank runs vs. bank panics, discount window, re-pricing gap, cumulative gaps (CGAP), spread effect, runoff, net worth, mark to market basis, 
			Data Sets:
			Application Modules:
			Classroom Case Studies
			Course Optional Reserve Readings:
Class 13 (11/14/17) – Managing Risk Off the Balance Sheet With 
Derivatives, 	Options, Loan Sales, and Securitization
Text, Saunders, 752-822
Key Terms: spot vs. forward vs. futures contract, naïve hedge, risk immunization, micro-hedging, macro-hedging, routine hedging, selective hedging, plain vanilla swap, currency swap, credit swaps, total returns swap, pure credit swap, naked options, Commodities Futures Trading Corporation (CFTC), Financial Accounting Standards Board (FASB), Bank for International Settlements (BIS), collar hedging, highly leveraged transaction (HLT), participation loans, less developed country (LDC) loans, Closed-end Bank Loan Mutual Funds (1988), fraudulent conveyance, pass-through security, full vs. partial amortization, collateralized mortgage obligation (CMO, 1983, Credit Suisse, FHLMC), real estate mortgage investment conduits (REMIC’s), planned amortization class (PAC), mortgage-backed bonds (MBBs), 
Data Sets:
			Application Modules:
			Classroom Case Studies
			Course Optional Reserve Readings:
Final Review

Class 14 (11/16/17) -	Final Examination

***Key 

Policies and Procedures:

1.  	Grading:  Final examination:	      40% (cumulative; essays and objective) 
		   Mid-term:   	      30% (essays and objective)
	                  Research project:        30% (deadlines, guidelines 
					posted in syllabus)*
2.  	Make-up examinations:  None.  A student who misses an exam for a valid reason may request permission from the instructor to submit a substitute paper, with the instructor's prior approval of the topic. The paper is to be typed, at least 10 double-spaced pages in length, and is to be submitted within 2 weeks of the previously scheduled exam. No paper substitute is permitted for the final examination. 
3. 	Office Hours: As to be arranged on class days. 
                 http://msuweb.montclair.edu/~lebelp/CurrentCourseMaterials.html
4.	Other Contacts: 	Telephone (h) (410)-546-4931; © (410)-603-1124
					e-mail: lebelp@montclair.edu. 

Research Project Guidelines:
Students are to prepare a research project in stages that are stipulated in the syllabus.  The format of the paper, and each of the associated preparatory stages, is to contain the title, the student’s name and i.d., and an email address.  No electronic submissions are allowed in the course and a written version of what you should keep stored in your computer files is the form in which submissions are accepted.

Project topics are based on a student combining original sources with readings used in the course, with formatting style of citations as used in the syllabus.  The paper is to be fully justified, paginated as in the style of the syllabus, with footnotes, tables, and charts cited as per standards used in journals such as the AER, JF, JMCB.  The paper is to be double-spaced, with a length ranging between 15 and 25 pages.  No paper shorter or longer than this will be accepted.  The focus of a project is the development of a comprehensive business plan that incorporates tools and techniques from financial institutions to launch a new business.

Delays in submissions for various stages of the paper will result in grading penalties.  Students are encouraged to communicate in person or via email with the instructor regarding the choice of topics, or related questions regarding the submission stages of the paper.  

Economic Data Source Materials 
	  see:  Useful Economic Data Links (on the instructor’s home page);
Federal Reserve Bank of St. Louis:                                  http://research.stlouisfed.org/aggreg/swdata.html
Federal Reserve Bank of New York:
	 http://www.newyorkfed.org/
Federal Reserve Bank of Minneapolis:
     	 http://www.minneapolisfed.org/
Federal Reserve Bank of Dallas:
	  http://dallasfed.org/index.cfm
Federal Reserve Bank of San Francisco:
	 http://www.frbsf.org/
Congressional Budget Office:
	  http://www.cbo.gov/
 CEA - Economic Report of the President:
	http://www.gpoaccess.gov/eop/
Congressional Research Service:
	http://opencrs.com/

Publication Sources
A.	Economic Journals (selected listing)
 
Agricultural and Resources Economics
	Agricultural Economics
	American Economic Review
	American Economist
	American Journal of Agricultural Economics
	Antitrust Bulletin
	Applied Economics
	Brookings Papers on Economic Activity
	Bulletin of Economic Research
	Business Economics
	Computational Economics
	Eastern Economic Journal
	Economic Development and Cultural Change
	Economic Geography
	Economic History Review
	Economic Inquiry
	Economic Journal
	Economics of Education Review
	Economics Letters
	Econometrica
	Energy Economics
	Environment and Development Economics
	Environment and Resource Economics
	Family Economics and Nutrition Review
	Games and Economic Behavior
	Health Economics
	History of Political Economy
	Industrial and Labor Relations Review
	Information Economics and Policy
	Journal of African Economics
	Journal of Agricultural and Applied Economics
	Journal of Agricultural and Resource Economics
	Journal of Banking and Finance
	Journal of Business
	Journal of Cultural Economics
	Journal of Development Studies
	Journal of Economic Issues
	Journal of Economic Literature
	Journal of Economic Perspectives
	Journal of Financial Services Research
	Journal of Futures Markets
	Journal of Health Economics
	Journal of Human Resources
	Journal of Political Economy
	Journal of Population Economics
	Journal of Risk and Insurance
	Land Economics
	Marine Resource Economics
	Public Choice
	Quarterly Journal of Economics
	Real Estate Economics
	Resource and Energy Economics
	Review of Economics and Statistics
	World Development

B.  General Business Periodicals (see also:  Useful Economic Data Links )
	Business Week
	The Economist
	The Financial Times
	U.S. News and World Report
	The Wall Street Journal