Topics to be covered include: the analytics of a financial crisis - the Great Depression; bank runs and the current financial crisis; case studies: Bear Stearns and Lehman Brothers; funding, interest rate and currency risk, and liquidity crises; bank resolution; modelling risky debt, systemic risk and default; VaR, CoVaR and other risk measures; elements of term structure of interest rate models and hedging applications; housing, mortgages, and the subprime market; the Goodhart-Tsomocos Model of Financial Fragility, and measure of systemic risk; the sovereign debt crisis and the Euro area bailout.

Preliminary Syllabus

Session 1

Course Introduction

The Analytics of a Financial Crisis: The Great Depression

· Basic facts on output, prices, labour markets

· Hypothesis about causes

· The role of financial factors

Essential Reading

Bernanke, B. and James, H. (1991) “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison”, chapter in Hubbard, R.G. (ed.) Financial Markets and Financial Crises, University of Chicago Press, pp.33-68.

Search Oxford Libraries Online for print edition of this book

The Economist, Financial Crises: The Slumps that Shaped Modern Finance, Essay.

Freidman, M. (2006) “Why Money Matters”, Wall Street Journal, 17^th Nov., A.20.

Case Study

To be handed out in class.

Session 2

Bank runs and Bear Stearns

· The Diamond-Dybvig Model

· Bank Runs

· The Demise of Bear Stearns

Essential Reading

Diamond, D.W. (2007) “Banks and Liquidity Creation: A Simple Exposition of the Diamond-Dybvig Model”, Economic Quarterly 93(2):189-200.

Wessel, D. (2010) “Unusual and Exigent”, chapter 9 in In FED We Trust: Ben Bernanke's War on the Great Panic, Three Rivers Press, pp.147-175.

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Case Study

To be handed out in class.

Session 3

Lehman Brothers and the Financial Crisis of 2007-09

· Lehman Brothers

Sources of trouble and options

Run Dynamics

Controversial Decisions

Policy Decisions and fallout

· Effects on credit availability

· Post Lehman problems

· SpinCo – Bank Resolution Regimes

Essential Reading

Duffie, D. (2010) “The Failure Mechanics of Dealer Banks”, Journal of Economic Perspectives, 24(1):51-72.

Wessel, D. (2010) “Let Ol’ Lehman Go” and “Breaking the Glass”, chapter 1 & 11 in In FED We Trust: Ben Bernanke's War on the Great Panic, Three Rivers Press, pp.9-26 & 118-126.

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Friedman, M. (1998) “Reviving Japan”, Hoover Digest, 1998:2, Asia.

Greenlaw, D., Hatzius, J., Kashyap, A.K. and Shin, H.S. (2008) Leveraged Losses: Lessons from the Mortgage Market Meltdown, Proceedings of the U.S. Monetary Policy Forum 2008, U.S. Monetary Policy Forum Report No. 2. Rosenberg Institute, Brandeis International Business School and

Initiative on Global Markets, University of Chicago Graduate School of Business.

Ivashina, V. and Scharfstein, D. (2008) “Bank Lending During the Financial Crisis of 2008”, Journal of Financial Economics 97(3):319-338.

Krishnamurthy, A. (2010) “How Debt Markets Have Malfunctioned in the Crisis” Journal of Economic Perspectives, 24(1):3-28.

HM Treasury (2013) RBS and the Case for a Bad Bank: The Government’s Review, HM Treasury, London.

Available to download from gov.uk

Ingves, S. et al. (2009) Lessons Learned from Previous Banking Crises:Sweden, Japan, Spain, and Mexico, Occassional Paper No. 79. Group of Thirty, Washington DC.

Available to download from Group of Thirty

Martini, L. et al. (2009) Bad Banks Finding the Right Exit from the Financial Crisis, McKinsey Working Papers on Risk.

Available to download from Mckinsey

Case Study

To be handed out in class.

Session 4

The Sovereign Debt Crisis and Euro Area Bailout

· Greek and euro area history

· Debt sustainability

· Greece’s 2015 outlook

· Euro break up mechanics

· Cyprus

Essential Reading

Goldstein, M. (2003) Debt Sustainability, Brazil, and the IMF, Working Paper No. WP 03-1Institute for International Economics, Washington DC.

Available to download from The Peterson Institute for International Economics

Freidman, M. (1997) “The Euro: Monetary Unity To Political Disunity?”, Project Syndicate, 28^th Aug., 1997 <> viewed 29/04/2014.

Körner, K. (2011) Sovereign default probabilities online - Extracting implied default probabilities from CDS spreads, Global Risk Analysis, Deutsche Bank Research.

Walker, M. (2012) “How a Radical Greek Rescue Plan Fell Short”, Wall Street Journal May 10, 2014.

Available to print & view Wall Street Journal Online

3 part series by Peter Spiegel “How the euro was saved”, Financial Times 11, 14, 15 May 2014

Case Study

To be handed out in class.

Session 5

Corporate Risk Management: Funding Risk

· Reasons for risk management

· Funding as a risk

· Funding and risk management issues during the 2008 crisis

· Funding cost drivers

Corporate Risk Management: Interest-rate Risk

· Bond and interest-rate basic concepts

· Yield curves

· How to develop an interest-rate risk hedging policy

Essential Readin