Introduction to Financial Institutions
Course Number 1548
Senior Lecturer Robert C. Pozen
Fall; Q1; Q2; 3 credits
This full semester course in the fall of 2012 will provide a broad overview of the business functions and regulatory constraints for the various types of financial institutions. It will cover financial institutions in Asia and Europe as well as in the United States.
Some financial institutions serve as pass-throughs, or agency institutions, where the risks and returns to clients depend primarily on the investment results of the institutions. Such institutions include mutual funds, hedge funds, REITs and defined contribution plans such as 401k plans. Other financial institutions serve as guarantors, or principal institutions, where the institutions offer a fixed return to clients and the institutions retain the actual risks and returns of their investments. This group includes commercial banks, insurance companies, sovereign funds and defined benefit pension plans.
The course is NOT aimed at financial experts. It is is designed to explain how each type of financial institution operates -- describing its business model, risk-return profile and regulatory context. The syllabus includes background notes and hypothetical cases in order to educate students with little familiarity with each type of financial institution. Similarly, the course is NOT aimed at students who want to become portfolio managers. It is designed to help students understand the strategic decisions involved with the overall direction of a financial institution. These strategic decisions are analyzed from the viewpoint of the institution's top executives as well as relevant policy makers in governments. This course is appropriate not only for students who intend to work for financial firms but also for students who may work for other types of industrial firms that utilize the services of financial institutions. Moreover, the course would be very useful to students who may work for governmental bodies that oversee financial institutions.
The course grade will be based 50% on class participation and 50% on the final written exam. However, with my personal express approval, a student may submit a research paper in lieu of a final exam if he or she wants to do an ISR with me in the second semester on the subject of financial institutions. In specific, the ISR would be aimed at writing and actually publishing a HBS case or note with me on an aspect of financial institutions.
The course has four key educational objectives. First, it helps students understand how each institution works as a financial intermediary. Why are savers investing indirectly through financial institutions than directly in financial assets? Thus, students should learn what savers are seeking from different types of financial institutions - e.g., diversification of risk, expertise on asset selection, daily liquidity, and lower transaction costs.
Second, the course explains to students the extensive regulatory frameworks applicable to financial institutions. They are much more heavily regulated than publicly held operating companies for a variety of reasons. Students should learn the rules that limit the scope of the activities of financial institutions and how they are allowed to carry out these activities - e.g., restrictions on the types of assets they hold, their concentration of investments, forms of governance and amounts of fees.
Third, the course teaches students how top-level managers grapple with strategic decisions involving tensions between the institution's economic goals and its regulatory constraints. The cases put students in the position of a senior official of a financial institution who must make a tough decision. These decisions involve asset and liability choices in normal times as well as during the financial crisis of 2008-2009.
Fourth, the course asks students to think about how the financial system should be reformed in light of the recent financial crisis. This subject is addressed through policy sessions on proposals to change mortgage securitization and the new regulatory framework for systemically risky institutions. This subject is also addressed by cases involving financial institutions weighing the pros and cons of accepting various forms of government assistance.