Managing the Financial Firm
Course Number 1509
Professor David Scharfstein
Winter; Q3Q4; 3 credits
In MFF, we examine the challenges and opportunities faced by financial industry managers in the "post-crisis" world. We seek to understand of how they can effectively navigate these challenges and take advantage of new business opportunities that are emerging in the changing environment.
Financial firms play a central role in the proper functioning and health of the global economy, providing capital for growth, the "plumbing" to facilitate liquidity and transactions, and the tools to manage risk. The scope of activities is substantial, with financial firms offering a variety of products and services, including credit, investments, risk management tools, advice - to a variety of clients around world - institutional investors, businesses, individuals and governments. These firms assume an array of organizational forms to compete in the marketplace, evolving over time as the marketplace and regulatory regimes change; some are highly focused and some have a substantial breadth of activities. The financial industry continues to undergo unprecedented change as a result of the financial crisis, with business practices and models of many firms and whole sectors having been called into question, and the relationships among the financial industry, the "real economy" and government under fundamental reexamination.
For the most part, we will focus on financial firms that provide banking services, broadly defined. These includes community banks, regional banks, global banks, investment banks, and "shadow banks" - entities such as hedge funds, money market funds, and online lending platforms that don't have banking charters but provide banking services. It also includes the largest and arguably most important bank - the central bank.
The course is divided into three basic modules:
1. The Finance of Banking
2. The Failure of Banking
3. The Future of Banking
In the first module, we will examine a set of case studies that highlight important issues and management challenges in retail, commercial and investment banking. In the second module, we'll study the spectacular failure of the banking system during the financial crisis - how banks mismanaged both sides of their balance sheets - and the unprecedented response of the government to stabilize the financial system. We'll also look at the regulations that have been put in place to achieve longer-term financial stability. The final module will examine how banks' business models are evolving in response to the experience of the financial crisis and the new regulatory environment.
While there will be policy discussions in the course, particularly in the second module, the main perspective is that of financial firms, not policymakers. But it is important to keep in mind that financial firms simply cannot be managed effectively without an understanding of financial regulation and its essential role it plays in the financial system.
The classes will mainly be discussion of cases, but some classes will be devoted to discussion of academic articles and white papers on important issues in the financial system. Case protagonists and leading industry executives will often visit class to provide their perspectives as well.