Financial Institutions: Banks and Beyond

Course Director: Sophie-Dorothee Rotermund

Content
Banks and other financial intermediaries channel savings into productive investment, but the same mechanisms that make them valuable - maturity transformation, delegated monitoring, liquidity insurance - also make them fragile. This course studies why financial intermediaries exist, how they create and manage risk, why they periodically fail, and how regulation and non-bank alternatives have reshaped the financial system since the Global Financial Crisis.
The course is run as a combination of a traditional lecture course, research-oriented reading group, and in-class exercises. Certain framing lectures introduce underlying economic concepts, economic models, or institutional details. The objective is to give students an intuition for the theoretical concept and institutional setting so that they can apply it and understand its real-world application. Students are also required to present and lead a discussion of an assigned academic paper. Furthermore, selected sessions are anchored around a real-world case study, e.g., the 2023 collapse of Silicon Valley Bank, that connects theory to recent events. In-class exercises further link the concepts studied to their real-world applications.

Format & Structure

The course is run in a combined lecture-and-seminar format. Each session combines a lecture by the course director, covering relevant theories, concepts, and institutional background, with open interaction through student presentations and discussions of assigned academic papers. The balance between the two is set session by session, depending on the topic and the material available. Guest lectures may also be included to complement the course content by drawing on the guest lecturer's
professional expertise.

Additionally, we will solve exercises to complement the course content and further deepen students’ understanding of it and its applications.

The course is organized around thematic blocks. The topics listed under each block are illustrative examples, not an exhaustive or fixed list. Thematic blocks may be removed or added. Also, the number and sequence of sessions within a block, as well as individual topics within, may be adjusted as the course is finalized:

• Foundations of Financial Intermediation: why banks and other intermediaries exist; reading and comparing bank balance sheets and business models.
• Information Frictions in Banking: hidden characteristics and adverse selection (delegated monitoring); hidden action and moral hazard (lending, covenants, relationship banking).
• Bank Fragility and Regulation: bank runs and liquidity insurance; contagion and financial crises; capital regulation and "too big to fail".
• Investment Banking and Capital Markets: the economics of underwriting and seasoned securities offerings; IPO underpricing and the book-building process.
• Non-Bank Finance ("Shadow Banking"): private credit and direct lending; securitization; repo markets and money market funds.
• Central Banks and Money: the role of money and central banks; current challenges to central banks (e.g., central bank digital currencies).

Each student should present at least once during the semester. Active participation in the discussion is expected in every session.

Relevance to the Students

1. As an elective near the end of the BSc program, this course brings together and applies material from earlier courses in corporate finance, financial markets, microeconomics, and macroeconomics to the single domain of banking and financial intermediation. It introduces students to the study of that domain in academic research and equips them to critically engage with real-world developments in banking and finance.
2. The course director holds a PhD in finance from Frankfurt School of Finance & Management and was a PhD Research Fellow at Harvard Business School. Her research on leveraged lending, non-bank financial intermediation, and private credit markets, as well as prior experience at the European Central Bank, directly inform the course content.
3. The course is grounded in the academic literature on financial intermediation and banking theory, drawing on both classic theoretical contributions and current empirical research.
4. The course helps prepare students for careers in commercial and investment banking, asset management, central banking and financial regulation/supervision, private credit and other non-bank lending, and financial consulting, as well as for further graduate study in finance or economics.

Implementation of FREE

• Fact- and science-based mindset: the entire course is built around close reading of academic research; students learn to evaluate the evidence and assumptions behind influential concepts and models.
• Reflective and self-aware: several sessions explicitly include a critical evaluation of the course content, training students to question rather than simply accept, and derive implications.
• Empathetic and culturally literate: comparing European and US banking systems and regulatory approaches, for example, exposes students to how institutional and cultural contexts shape financial systems.
• Entrepreneurial and responsible: the course examines how financial systems evolve, prompting discussion of both the opportunities and the systemic responsibilities that come with operating outside the traditional banking safety net.

Implementation of Sustainability goals and principles
The course's core contribution to sustainability is financial stability itself: understanding why intermediaries fail and how regulation contains systemic risk is a precondition for a financial system that can reliably fund the real economy, including the investment needed for a sustainable transition.

Where possible, the course will touch on the growing role of private capital in financing climate and infrastructure investment, and on how prudential regulation increasingly incorporates climate-related financial risk.

Course administrator: Anneli.Sandbladh@hhs.se

After completing this course, students will be able to:

1. Explain why banks and other financial intermediaries exist and what economic function they perform, using economic concepts such as adverse selection, moral hazard, and delegated monitoring.
2. Analyze the sources of financial fragility and evaluate the policy responses designed to contain them (e.g., deposit insurance, lender of last resort, capital regulation).
3. Compare how investment banks and non-bank financial institutions operate, and assess how their functions and risk profiles differ.
4. Critically read, summarize, and present academic finance papers to an audience of peers, and constructively question and discuss the presentations of others.
5. Apply the course's theoretical frameworks to real-world case studies to explain observed behavior in financial institutions.

Students should have completed introductory courses in finance, micro- and macroeconomics, and statistics/econometrics.

There is no single core textbook. The course is built around a curated set of academic papers (journal articles and NBER/BIS/central-bank working papers), supplemented by optional background chapters
from, e.g., Greenbaum, Thakor & Boot, Contemporary Financial Intermediation, Mishkin, The Economics of Money, Banking, and Financial Markets, Saunders & Cornett, Financial Institutions
Management or De Haan, Oosterloo, & Schoenmaker: European Financial Markets and Institutions.

Most papers are freely accessible via the SSE library or as open working papers and will be shared with the students before class.
Illustrative readings are, for instance:

● Dang, Gorton & Holmström (2019), The Information View of Financial Crises, Annual Review of Financial Economics;
● Diamond & Dybvig (1983), Bank Runs, Deposit Insurance, and Liquidity, Journal of Political Economy;
● Benveniste & Spindt (1989), How Investment Bankers Determine the Offer Price and Allocation of New Issues, Journal of Financial Economics;
● Chernenko, Erel & Prilmeier (2022), Why Do Firms Borrow Directly from Nonbanks?, Review of Financial Studies;
● Gorton & Metrick (2010), Haircuts, Federal Reserve Bank of St. Louis Review;
● Jang, Kaplan & Schulze (2024), A Survey of Private Debt Funds, Review of Corporate Finance Studies;
● Lewis (2016), Money Market Funds and Regulation, Annual Review of Financial Economics;
● Metrick (2024), The Failure of Silicon Valley Bank and the Panic of 2023, Journal of Economic Perspectives;
● Rock (1986), Why New Issues Are Underpriced, Journal of Financial Economics;
● Roberts & Sufi (2009), Control Rights and Capital Structure: An Empirical Investigation, Journal of Finance.

Note that this is a non-exhaustive list, and subject to change as sessions are finalized.

The final grade is based on two components:

A presentation of an assigned academic paper (30%) and a final written exam (70%). Presentations are evaluated on the accuracy and depth of understanding of the paper and the clarity of the connection drawn to course concepts. In-class exercises and open discussions of the lecture material and presented papers take place in every session but are not separately graded. Together with the lectures and presentations, they form the basis for the final written exam, which tests the theoretical concepts and their application covered throughout the course.

Depending on the number of participating students, they will present in groups.

Find the course schedule in TimeEdit

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