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The Economics of Financial Crises

Module description

This model explores the causes of the recent financial crisis and in particular the lesson which can be learnt. You will gain an understanding of the mechanistic causes of financial crises and in particular the processes of securitisation, Collateralized Debt Obligation (CDOs) and Credit Default Swaps (CDS) and at the end you will have a good understanding of both the narrow and wider causes of the 2007/8 financial crisis. You will be taken through a series of case studies, including the collapse of Northern Rock Bank in the UK. These case studies will provide you with some context and understanding of some of the governance failures which occurred around the crisis. You will be exposed to a series of guest lecturers from practitioners who worked in senior positions during the financial crisis. These practitioners will recount their experiences during the financial crisis and will give you additional perspectives on the crisis.  The course draws on the personal experiences of the lecturer who worked right at a leading investment bank on a debt trading floor in the lead up to the crisis.

Module aims - intentions of the module

The overall aims of the course are to provide you with a good understanding of the broad causes of the latest financial crisis but in particular to focus on what are the lessons that can be learnt so that they might not be repeated. In particular the course will expose you to the teachings of behavioural economics as it can be applied to the financial crisis and will give you a much better understanding of not only why the crisis occurred but what can be done to prevent it from happening again in the future.

Intended Learning Outcomes (ILOs)

ILO: Module-specific skills

On successfully completing the module you will be able to...

• 1. critically review and discuss seminal papers and books written on the financial crisis;
• 2. explain the technical innovations around the financial crisis including how collateralized debt obligations, mortgage backed securities, credit default swaps and repos work and how they impacted the financial crisis;
• 3. explain the concept of financial leverage and deleverage and how this impacted the financial crisis;
• 4. critically review and analyse the role that the various actors (rating agencies, bankers, regulators) played in the financial crisis.

ILO: Discipline-specific skills

On successfully completing the module you will be able to...

• 5. critically evaluate and formulate a well-founded answer to a specific topical research related question.

ILO: Personal and key skills

On successfully completing the module you will be able to...

• 6. deliver coherent arguments in written work;
• 7. demonstrate analytical and critical thinking skills.

Syllabus plan

The following syllabus plan is indicative:

• A detailed analysis of the causes of the 2007/8 financial crisis and an explanation of how collateralised debt obligations, mortgage backed securities, credit default swaps and repo work and the role that such financial innovation played in the crisis itself.
• An analysis of case studies around the crisis such as the collapse of, Northern Rock, Lehman Brothers,
• How financial leverage is achieved including an explanation of how investors can “short” and the consequences of both leverage and subsequent deleverage had on the financial markets.
• Guest lectures from the industry. These change on a year by year basis but normally three to four guest lecturers are invited to give a speech about their specific experiences around the crisis and the lessons which they think can and should be learnt.

Learning activities and teaching methods (given in hours of study time)

Details of learning activities and teaching methods

Formative assessment

Summative assessment (% of credit)

Details of summative assessment

Details of re-assessment (where required by referral or deferral)

Re-assessment notes

Deferral – if you have been deferred for any assessment you will be expected to submit the relevant assessment. The mark given for a re-assessment taken as a result of deferral will not be capped and will be treated as it would be if it were your first attempt at the assessment.

Referral – if you have failed the module overall (i.e. a final overall module mark of less than 40%) you will be expected to submit the relevant assessment. The mark given for a re-assessment taken as a result of referral will be capped at 40%

Indicative learning resources - Basic reading

Basic reading:

The recommended text books are:

• Cassidy, J. (2010). How markets fail: The logic of economic calamities. London: Penguin.
• Shiller, R.J. (2008). The subprime solution: How today's global financial crisis happened and what to do about it. Princeton, NJ: Princeton University Press.

Indicative learning resources - Other resources

A wide range of books and articles will be provided to students in addition to relevant audio visual and documentaries.

Key words search

financial crises, bank runs, asset price bubbles