FINA104 LETURE NOTES
FINA0104
Management of Commercial
Banks
Prof. Keith K. P. Wong
Fall 2013
• Course Objective:
The focus of this course is on the economics of commercial banks. This course seeks to enhance your understanding of why commercial banks exist and what economic roles they play, the risks faced by banks in the lending process, off-balance sheet banking, deposit insurance, bank regulation, and risk management.
1
The economics of financial contracting in the banking industry---from deposit contracts to derivative instruments---and the interplay between information, technology, and regulation in shaping contracts and institutions in the financial markets will represent the guiding theme of the course.
The approach is analytical rather than descriptive. • Required Text:
Greenbaum, S.I. and A.V. Thakor, 2007,
Contemporary Financial Intermediation, 2nd ed.,
Academic Press.
• Grading:
The course grade is made up as follows:
Mid-Term Test
October 21 (Mon.)
30%
Homework
Biweekly
10%
Final Exam
To Be Announced
60%
2
•
•
•
•
•
Tutor:
Office:
Tel.:
E-mail:
Office hrs:
Wilson Law
KKL930
2859-1044 kitpongwong@hku.hk 2:30p.m. – 3:30p.m., Friday
Lecture Note 1
Basic Concepts
3
Risk Preferences
• Lottery: p。x (1 – p)。y.
It means that prize x is received with probability p and prize y is received with probability (1 – p). p x
1–p
y
• Expected Utility Theorem
Given some mild assumptions, there is a utility function, U, that describes an individual’s preferences over lotteries and has the following expected utility property:
U(p。x (1 – p)。y)
= pU(x) + (1 – p)U(y).
That is, the utility of a lottery is the expectation of the utility from its prizes.
4
• Risk Neutrality
– An individual is said to be risk neutral if he is indifferent between the certainty of receiving the expected value of a lottery and the uncertainty of the lottery itself. That is,
U[E(W)] = E[U(W)],
Management of Commercial
Banks
Prof. Keith K. P. Wong
Fall 2013
• Course Objective:
The focus of this course is on the economics of commercial banks. This course seeks to enhance your understanding of why commercial banks exist and what economic roles they play, the risks faced by banks in the lending process, off-balance sheet banking, deposit insurance, bank regulation, and risk management.
1
The economics of financial contracting in the banking industry---from deposit contracts to derivative instruments---and the interplay between information, technology, and regulation in shaping contracts and institutions in the financial markets will represent the guiding theme of the course.
The approach is analytical rather than descriptive. • Required Text:
Greenbaum, S.I. and A.V. Thakor, 2007,
Contemporary Financial Intermediation, 2nd ed.,
Academic Press.
• Grading:
The course grade is made up as follows:
Mid-Term Test
October 21 (Mon.)
30%
Homework
Biweekly
10%
Final Exam
To Be Announced
60%
2
•
•
•
•
•
Tutor:
Office:
Tel.:
E-mail:
Office hrs:
Wilson Law
KKL930
2859-1044 kitpongwong@hku.hk 2:30p.m. – 3:30p.m., Friday
Lecture Note 1
Basic Concepts
3
Risk Preferences
• Lottery: p。x (1 – p)。y.
It means that prize x is received with probability p and prize y is received with probability (1 – p). p x
1–p
y
• Expected Utility Theorem
Given some mild assumptions, there is a utility function, U, that describes an individual’s preferences over lotteries and has the following expected utility property:
U(p。x (1 – p)。y)
= pU(x) + (1 – p)U(y).
That is, the utility of a lottery is the expectation of the utility from its prizes.
4
• Risk Neutrality
– An individual is said to be risk neutral if he is indifferent between the certainty of receiving the expected value of a lottery and the uncertainty of the lottery itself. That is,
U[E(W)] = E[U(W)],