FI/EC 360 - Asset Markets, Banking and the International Financial System

This course deals with of the importance of financial asset markets, their influence on the economy, and how they are constrained by their international environment. Although the course focuses on money, arguably the most important financial asset in economic life, it also gives an overview of other, important classes of financial assets, i.e., equities, bonds and derivative securities. It will cover the characteristics of these assets, the principal functions they perform and the institutional environment in which they are traded.

With advancing globalisation, business life becomes increasingly international in character. This is central to this course in several ways. First, the asset markets of different countries become highly integrated, so that shocks are rapidly transmitted throughout the world no matter where they originate. It is important to consider these linkages when examining asset markets, because they constrain the scope to organise “domestic” markets through policy action.

Second, with expanding international trade, banks have become multinational enterprises, active simultaneously in many financial centres. Thus, it is necessary to understand the role of banks in the international transmission of disturbances and the need to implement regulation (such as risk management) in a global framework. We will deal with the main activities of the three dominant types of bank – central banks, commercial banks and investment banks (however blurred the dividing lines between the final two are becoming) – because their main fields of activity remain as relevant as ever. The role of “shadow banks” will also be dealt with because of the need they create to expand the scope of banking regulation.

Returning to our focus on money in the international economy, it is important to understand how exchange rates are determined, i.e. the relative price of two currencies. The course covers the determination of exchange rates. As volatile exchange rates are very disruptive to international trade and payments, the essential features of exchange-rate equilibrium are covered. Different exchange-rate regimes of the past 100 years are also surveyed. The evolution of the European Union is analysed as an exercise in economic and political integration, the largest voluntary episode of its kind in history. The Eurozone is an ultra-fixed exchange-rate system and we ask if the conditions for such can be met on a voluntary basis.