Growth and Architecture of Financial Systems

Evidence accumulated over the last 10 years demonstrates that improvements in financial intermediation generate economic growth, both across countries and over time. We begin by surveying this literature and engaging with some of its subtleties - such as the relative merits of bank-based and market-based financial systems and the role of different legal systems in determining the level and pattern of investment.

We then consider bank-based systems in more depth. What are their strengths and weaknesses? How has the financial system and government regulation evolved to build on their strengths and offset their weaknesses? We investigate the distinctive roles of central banks, deposit banks, investment banks and universal banks in the system. We examine the causes and consequences of runs on individual banks as well as contagions between banks. We consider the merits of both "narrow banking" and "local banking", in terms of their efficiency, equity and stability. We examine the roles of local, national and international regulation (such as the Basel Accords).

We then move on to an analogous consideration of market-based financial systems, investigating the distinctive roles of stock markets, mutual funds and insurance companies. What is the impact of stock market micro-structure? Is there a rôle for regional stock markets? How should insurance companies be regulated?

The course will be largely empirical, drawing on both contemporary and historical evidence, but will be layered upon a theoretical skeleton.

The format is a class discussion, in which all students are expected to fully participate every week. Students are encouraged to work in small groups to prepare for each class. Each week, every group member should read (at least) one of the items on the reading list and then discuss it with the rest of the group. In this way, all - or most - of the reading materials assigned each week will be covered by every group. The group can use this discussion to...