1
VESALIUS COLLEGE
Spring Term 2013
Course Syllabus: ECN 223E
THE INTERNATIONAL BANKING SYSTEM
Contact Details for Professor
Tel: (02) 344 01 79
GSM: (0477) 67 74 71 (only in emergencies)
E-mail: belleman@bu.edu
Office hours and location:
Thursdays, 10.30 a.m. -11.30 a.m. (meeting room close to the “reception”)
Course prerequisite
ECN 101E
Learning Objectives
After this course, you should be able to:
- Understand the role of the banks in the financial system.
- Be familiar with the main types of banks, and the ranges of services offered by them,
particularly lending, investment banking and private banking.
- Understand the financial crisis that began in 2008, and its effects on the international
banking system.
- Analyze annual reports of banks, and their performance.
- Be familiar with the way banks are organized, and with the careers they offer.
Course Description
This course provides an overview of the international banking system, including such
topics as: (1) the role of the banks in the financial system; (2) regulatory and policy
aspects; (3) services offered by banks; (4) analysis of bank performance; (5)
macroeconomic perspectives in banking; and (6) comparison of the banking structures
and environments in Europe, the U.S.A., Latin America, Japan, and developing nations. .
Course Material
Syllabus:
ECN 223E – The International Banking System
Spring 2013
2
(A) Textbook
“Bank Management and Financial Services” (Peter Rose, Sylvia Hudgins) (McGraw-Hill,
ninth edition, 2012, ISBN 978-007-132642-1).
(B) “Reader”
The “reader” includes the following documents, which are in the order in which they will
be discussed. I have indicated the number of the sessions during which they will be
discussed.
(1) + (2) + (5) + (6) "Note on the banking industry" (Harvard Business School 9-311011).
(1) + (2) Documents from national and international regulatory authorities:
- Bank for International Settlements (BIS) / Basel Committee for Bank Supervision
(BCBS) (including documents on the "Basel I", “Basel II” and "Basel III" regulations).
- European Banking Authority (EBA)/Committee of European Banking Supervisors.
- Financial Services and Markets Authority (FSMA) (Belgium)
(1) + (2) Documents from central banks:
- European Central Bank (ECB)
- National Bank of Belgium (NBB)
(3) + (4) "Foreign exchange markets and transactions" (Harvard Business School 9-205016).
(7) "Bank of America-Merrill Lynch" (Harvard Business School 9-910-026).
(8) “Introduction to derivative instruments” (Harvard Business School 9-295-141).
(11) Documents on issues of stock/shares and of bonds by banks.
(12) + (13) “The financing of corporations”.
(12) + (13) “Statement of sources and uses of funds”.
(12) + (13) "Cartwright Lumber Company" (Harvard Business School 9-204-126).
(14) "Santander's acquisition of Abbey: banking across borders" (Harvard Business
School 9-707-485).
(C) Documents handed out separately
Syllabus:
ECN 223E – The International Banking System
Spring 2013
3
(1) + (2) Leaflet “Who are we” of the National Bank of Belgium (NBB).
(5) + (6) Annual reports of banks.
(D) “Financial Times”
I strongly recommend that you read every day this outstanding newspaper, which is
available free of charge to the students taking this course. This is an excellent way:
- to learn what the "real business world" is all about;
- to learn about the topics covered not only in this course, but also in your other business
courses;
- to follow the news and the changes involving the international banking system.
Important remarks
(1) It is impossible for any student to follow this course if he or she does not have his
or her own copies of the textbook and of the "reader".
(2) It is essential that, before each session, you study thoroughly all the documents
specified in this syllabus for that session, and that you bring with you these
documents, as well as this syllabus and the textbook.
(3) Attendance and active class participation are equally essential.
*****************
Grading Scale of Vesalius College
Vesalius College grading policy, in line with the Flemish Educational norms, is now as
stated below:
Grade
A
AB+
B
BC+
C
CD+
D
F
Syllabus:
Scale of 20
17.0-20.0
16.1-16.9
15.3-16.0
14.5-15.2
13.7-14.4
13.1-13.6
12.3-13.0
11.5-12.2
10.7-11.4
10.0-10.6
Below 10
Scale of 100
85-100
81-84
77-80
73-76
69-72
66-68
62-65
58-61
54-57
50-53
0-49
ECN 223E – The International Banking System
Spring 2013
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Course Assessment
The students will be evaluated on the basis of their performance as follows:
(1) Preparation of the classes (including the written assignments): 40 per cent.
(2) Class attendance and class participation (i.e. quantity and quality of the participation
in the class discussions): 10 per cent.
(3) The “take-home” mid-term examination: 25 per cent.
(4) The “in-class” final examination: 25 per cent.
The final grade will be the weighted average of the grades for these four components:
Grading Criteria
The following criteria will be applied in assessing your written work:
Evidence of understanding of the concepts, theories and ideas developed in the
course.
The degree to which your answers to the questions assigned are specific, complete,
clear and convincing.
Additional Course Policies
Any non-respect of the deadlines for the submission of the written assignments and of the
papers for the “take-home” mid-term examination will be penalized.
Academic Honesty Statement
Academic dishonesty is NOT tolerated in this course.
Academic honesty is not only an ethical issue but also the foundation of scholarship.
Cheating and plagiarism are therefore serious breaches of academic integrity.
Following the College policy, cheating and plagiarism cases will be communicated in
writing to the Associate Dean for Students and submitted to the Student Conduct
Committee for disciplinary action.
If you refer to someone else’s work, appropriate references and citations must be
provided. Grammar, spelling and punctuation count, so use the tools necessary to correct
before handing in assignments.
Course Schedule (Thursdays, 1.30 p.m. to 4.30 p.m.)
Syllabus:
ECN 223E – The International Banking System
Spring 2013
5
Session
1
2
3
4
5
6
7
Day
January 24
January 31
February 7
February 14 (deadline for the submission of the first written assignment)
February 21
February 28 (deadline for the submission of the second written assignment)
March 7 (deadline for the submission of the papers for the “take-home” midterm examination)
8
March 14
9
March 21
10
March 28
(no session on April 4 and 11: spring recess)
11
April 18
12
April 25 (deadline for the submission of the third written assignment)
13
May 2
14
(“make-up” date for May 9, which is an official holiday) (deadline for the
submission of the fourth written assignment)
15
May 16 (“in-class” final examination)
WRITTEN ASSIGNMENTS
The written assignments are a very important part of your learning process, and of your
final grade.
(1) They have to be prepared individually.
(2) Each written assignment must be given to me at the beginning of the corresponding
session (I will not take into account any assignment given to me later).
(3) A student who is unable to attend a session for which a written assignment is due,
should send it to me by e-mail (belleman@bu.edu) before that session.
******************
The written assignments are described in this syllabus. They are due as follows:
Number
1
2
3
4
Syllabus:
Session
4
6
12
14
Topic
Currencies/foreign exchange
“Key metrics" of banks
The case “Cartwright Lumber Company”
The case “Santander’s acquisition of Abbey: banking
across the borders”
ECN 223E – The International Banking System
Spring 2013
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THE “TAKE-HOME” MID-TERM EXAMINATION (DUE AT THE BEGINNING
OF SESSION 7 – THURSDAY MARCH 7)
The subject of this examination is the analysis of the evolution of the spot exchange rates
between two currencies during the last twelve months, and of the main reasons for the
largest changes in these rates.
Practically
(1) You should go to:
http://www.x-rates.com/graph/
(2) You should “configure the converter” for the two currencies specified for each of you
in a document handed out during the first session, and you should specify that you want a
twelve-month graph by clicking on “1Y”.
For example, if the couple of currencies that is assigned to you is USD/EUR (i.e. the
number of USD per EUR), you should select:
In that case, the address is:
http://www.x-rates.com/graph/?from=EUR&to=USD&amount=1
(3) By moving the “arrow” on the graph, you will find the exchange rates day by day.
(4) In addition, you will find the daily rates at the following address:
http://fx.sauder.ubc.ca/data.html
(5) For your couple of currencies, you should determine the five largest daily or weekly
changes in the spot exchange rate during the last twelve months.
(6) For EACH of these five changes, you should (a) quantify the change (in percentages,
specifying if it is an appreciation or a depreciation – see pages 9 to 11 of the note
“Foreign Exchange Markets and Transactions”), (b) determine what in your opinion is
(are) the main cause(s), and (c) explain your reasoning/your analysis. This should be
based on a research in the archives of reputable publications. Please note that you should
specify your sources in your paper.
Syllabus:
ECN 223E – The International Banking System
Spring 2013
7
Important remarks
(a) I suggest that, once you have downloaded the graph of the exchange rate between the
two currencies assigned to you, you focus on the steepest peaks and valleys – these often
correspond to the biggest variations.
(b) Once you have downloaded the daily exchange rates corresponding to the dates you
have derived from the graph, you should determine the biggest variation; this can be
between two successive “banking days”, or over three or four or (maximum) five
“banking days”.
(c) You should calculate, and include in your paper, each of the five changes as a
percentage, with two decimals.
(d) I remind you that the formula is as follows:
(most recent rate minus previous rate) divided by previous rate
Assuming that you analyze the ABC/XYZ rate:
- if the result is positive, this means that currency ABC has depreciated against currency
XYZ between the two dates;
- if the result is negative, this means that currency ABC has appreciated against currency
XYZ between the two dates.
****************
I appreciate that it is not easy to answer the questions for this examination if the two
countries corresponding to the currencies assigned to you are not closely connected from
the economic/financial point of view.
In that case, I suggest that you analyze the two currencies separately.
In my opinion, the best way to do this is to study the exchange rates between (a) each of
the two currencies and (b) a “basket of currencies”.
The most used “basket of currencies” is the “Special Drawing Rights” (SDR) of the
International Monetary Fund. Such a comparison enables you to focus on one currency at
a time.
Syllabus:
ECN 223E – The International Banking System
Spring 2013
8
The “links” on the subject of the SDR are as follows:
Definition of the SDR
www.imf.org/external/np/exr/facts/sdr.HTM
Present composition of an SDR
http://www.imf.org/external/np/tre/sdr/sdrbasket.htm
Daily SDR valuation
http://www.imf.org/external/np/fin/data/rms_sdrv.aspx
Exchange rates against the SDR
http://www.imf.org/external/np/fin/data/param_rms_mth.aspx
**********************
After having followed steps (1) and (2) above, I suggest that you download from the last
link above the exchange rates between (a) each of the two currencies assigned to you, and
(b) the SDR. This will enable you to determine if the variations of the exchange rates
between these two currencies:
- are mainly due to one of the two corresponding countries;
- or are due to both of these countries.
Then you should look for the major financial/economic/ political/labor/etc. news in this
country/these countries on the dates you have determined.
***********************
THE “IN-CLASS” FINAL EXAMINATION
This examination ("open book") will take place during session 15. The questions for this
examination will be of the same types as for the written assignments.
*****************
Syllabus:
ECN 223E – The International Banking System
Spring 2013
9
THE PROGRAM OF THE SESSIONS
SESSION 1 AND 2 (JANUARY 24 AND 31)
Topics
(a) Introduction to the course.
(b) Introduction to the international banking system.
(c) Regulatory aspects in the international banking system.
Readings
Chapters 1, 2 and 3 of the textbook.
"Note on the banking industry" (Harvard Business School 9-311-011).
Documents from national and international regulatory authorities:
- Bank for International Settlements (BIS) / Basel Committee for Bank Supervision
(BCBS) (including documents on the "Basel I", “Basel II” and "Basel III" regulations).
- European Banking Authority (EBA)/Committee of European Banking Supervisors.
- Financial Services and Markets Authority (FSMA) (Belgium)
Documents from central banks:
- European Central Bank (ECB)
- National Bank of Belgium (NBB)
SESSION 3 (FEBRUARY 7)
Topics
(a) International banking and the future of banking and financial services.
(b) Currencies/foreign exchange.
Readings
Chapter 20 of the textbook.
"Foreign exchange markets and transactions" (Harvard Business School 9-205-016).
Syllabus:
ECN 223E – The International Banking System
Spring 2013
10
SESSION 4 (FEBRUARY 14)
FIRST WRITTEN ASSIGNMENT DUE
Assignment
Please prepare the following table of "cross spot rates":
EUR
GBP
CHF
USD
JPY
AUD
EUR
GBP
CHF
USD
JPY
AUD
The students whose family names begin with a letter from A to G should prepare this
table on the basis of the "spot rates" as of January 25, 2013.
The students whose family names begin with a letter from H to P should prepare this
table on the basis of the "spot rates" as of February 1, 2013.
The students whose family names begin with a letter from Q to Z should prepare this
table on the basis of the "spot rates" as of February 8, 2013.
Sources of information
You should obtain the information necessary to answer this question from the following
web site of the Financial Times:
http://markets.ft.com/markets/overview.asp
You should (a) click on "currencies", (b) go to “Data archive”, (c) select "currencies
summary" in "select a report", and (d) click on the appropriate date. For example, for
January 11, 2013, the URL is:
http://markets.ft.com/RESEARCH/markets/DataArchiveFetchReport?Category=CU&Ty
pe=3SPT&Date=01/11/2013
To help you prepare this assignment and draw conclusion, you should of course study
thoroughly the note ""Foreign exchange markets and transactions".
***********************
Syllabus:
ECN 223E – The International Banking System
Spring 2013
11
Important remarks
Accuracy, precision, clarity and consistency are essential in business, and particularly as
regards currencies/foreign exchange. Consequently (and although the following rules are
not always respected in the note "Foreign exchange markets and transactions" !):
(1) For all the currencies, the ISO codes must be used (see the document “ISO 4217
currency code list” handed out separately).
(2) For exchange rates, it is essential to:
- always use all the digits shown in the sources of information;
- in the calculations, always use at least six "significant digits" (see the definition below);
- in the results, always write at least six "significant digits".
"Six significant digits" means for example: 0.00123456, and not 0.001234 - the two
zeros after the dot are not "significant digits".
The reason for this number of "significant digits" is the fact that the exchange rates
between the euro and all the currencies it has replaced have six "significant digits", for
example:
BEF/EUR and LUF/EUR: 40.3399. DEM/EUR: 1.95583. FRF/EUR: 6.55957. IEP/EUR:
0.787564. ITL/EUR: 1,936.27. NLG/EUR: 2.20371.
*********************
Topics and readings
Same as for session 3.
SESSION 5 (FEBRUARY 21)
Topics
(a) The financial statements of banks and their principal competitors.
(b) Measuring and evaluating the performance of banks and their principal competitors.
Readings
Chapters 5 and 6 of the textbook.
“Note on the banking industry”.
Annual reports of banks.
Syllabus:
ECN 223E – The International Banking System
Spring 2013
12
SESSION 6 (FEBRUARY 28)
SECOND WRITTEN ASSIGNMENT DUE
Questions
(1) For the banks specified below, what are the six "key metrics" described on page 7 of
the "note on the banking industry", as of December 31, 2010 and December 31,
2011/for the years 2010 and 2011 (except for Sumitomo Mitsui Financial Group) ?
(2) What are your conclusions as regards the evolution of these ratios from 2010 to 2011?
(3) For the same banks, what is the "price-to-book value ratio" (see page 8 of this note)
on the basis of the balance sheet as of December 31, 2011, and the stock price as of
February 22, 2013 ?
(4) For the same banks, what is the "price/earnings ratio" (see pages 8 and 9 of this note)
on the basis of the net income for 2011 and the stock price as of February 22, 2013 ?
Banks
Students whose family names begin with a letter from A to G: KBC Group. The 2011
annual report is available at
https://multimediafiles.kbcgroup.eu/ng/published/KBCCOM/PDF/COM_RVK_pdf_jaarv
erslag_2011_EN.pdf
Students whose family names begin with a letter from H to P: Citigroup Inc. The 2011
10-K (annual) report is available at
http://www.citigroup.com/citi/investor/data/k11c.pdf?ieNocache=310
Students whose family names begin with a letter from Q to Z: Sumitomo Mitsui Financial
Group. The report for the fiscal year ended March 31, 2012 is available at
http://www.smfg.co.jp/english/investor/library/annual/h2403annu_pdf/h2403_e_00.pdf
For this bank, you should calculate the "key metrics" as of March 31, 2011 and March
31, 2012/for the fiscal years ended March 31, 2011 and March 31, 2012.
Important remark
The classifications and the names in financial statements of banks vary from country to
country, and even sometimes from bank to bank within the same country.
Consequently, you may sometimes have to do some research to determine "what is
what". To help you, you should use the "notes to the financial statements" and the
glossary (if any) in the annual report you work on.
Syllabus:
ECN 223E – The International Banking System
Spring 2013
13
*********************
Topics and readings
Same as for session 5.
SESSION 7 (MARCH 7)
DEADLINE FOR THE SUBMISSION OF THE PAPERS FOR THE "TAKEHOME" MID-TERM EXAMINATION (SEE PAGES 6 TO 8 OF THIS
SYLLABUS)
Topics
(a) The banking/financial crisis.
(b) The acquisition of Merrill Lynch by Bank of America.
Case
"Bank of America-Merrill Lynch" (Harvard Business School 9-910-026). NOTE: during
this session, I will show you the documentary "Breaking the bank", produced in
2009 by the Public Broadcasting Service (PBS). This program focuses on the role of
the banks (and particularly Bank of America) in the banking/financial crisis.
SESSION 8 (MARCH 14)
Topics
(a) Discussion of the “take-home” mid-term examination. .
(b) Risk management for changing interest rates: asset-liability management and duration
techniques.
(c) Risk management: financial futures, options, swaps, and other hedging techniques.
(d) Risk management: asset-backed securities, loan sales, credit standbys, and credit
derivatives.
(e) Derivative instruments.
Readings
Chapters 7, 8 and 9 of the textbook.
“Introduction to derivative instruments” (Harvard Business School 9-295-141).
SESSION 9 (MARCH 21)
Topics and readings
Same as for session 8.
Syllabus:
ECN 223E – The International Banking System
Spring 2013
14
SESSION 10 (MARCH 28)
Topics
(a) The investment function in financial-services management. .
(b) Liquidity and reserves management: strategies and policies.
Readings
Chapters 10 and 11 of the textbook.
NO SESSION ON APRIL 4 AND 11 (SPRING RECESS).
SESSION 11 (APRIL 18)
Topics
(a) Managing and pricing deposit services.
(b) Managing nondeposit liabilities.
(c) Investment banking, insurance, and other sources of fee income.
(d) The management of capital.
Readings
Chapters 12, 13, 14 and 15 of the textbook.
..
SESSION 12 (APRIL 25)
THIRD WRITTEN ASSIGNMENT DUE (SEE UNDER “CASE” BELOW)
Topics
(a) Lending policies and procedures: managing credit risk.
(b) Lending to business firms and pricing business loans.
(c) Consumer loans, credit cards, and real estate lending.
(d) The financing of corporations (including bank loans, letters of credit, bank
guarantees, export/import financing, factoring, credit insurance, leasing, securitization).
Readings
Chapters 16, 17 and 18 of the textbook.
“The financing of corporations”.
“Flow of funds (sources and uses) statement” (i.e. “statement of sources and uses of
funds”).
Syllabus:
ECN 223E – The International Banking System
Spring 2013
15
Note
There are excellent “flash animations” on letters of credit/documentary credits and on
bank guarantees/bonds at:
www.ubs.com/1/e/ubs_ch/bb_ch/finance/trade_exportfinance/was_ist_wichtig.html
Case
"Cartwright Lumber Company" (Harvard Business School 9-204-126).
Questions to prepare:
(1) (written assignment due at the beginning of this session) What is the "statement of
sources and uses of funds" of Cartwright Lumber Company from December 31, 2001 to
December 31, 2003 ? What is the breakdown between internal and external sources of
funds between these two dates ? Note: for this question, please refer to the document
“Flow of funds (sources and uses) statement” (i.e. “statement of sources and uses of
funds”).
(2) On the basis of your answer to question (1), and of the contents of the case, please
explain why Cartwright Lumber Company must borrow so much money while this
business is profitable.
(3) What are your projections (rounded to the nearest thousand of USD) of:
(a) the income statement for 2004;
(b) the balance sheet as of December 31, 2004.
Important remark: please make the following assumptions for 2004 and for
December 31, 2004
- sales = USD 3.6 million;
- "cost of goods sold" and "operating expenses": same percentages of sales as in 2003;
- interest rate = 10.5 % per year, applied to the arithmetic average between the total of
"notes payable-bank" and "long-term debt", on December 31, 2003 (actual) and on
December 31, 2004 (projected);
- income tax rate: same percentage of net income before taxes as in 2003;
- "cash", "accounts receivable, net", "inventory", "property, net", "accounts and notes
payable", and "accrued expenses": same percentages of sales as on December 31,
2003/for 2003.
********************
Syllabus:
ECN 223E – The International Banking System
Spring 2013
16
(4) In your opinion, does the line of credit of USD 465,000 being discussed meet
Cartwright Lumber's requirements ? Why or why not ?
(5) What would be your answers to questions (3) and (4) if the company was paying its
suppliers 10 days after invoice date to take advantage of the 2 % discount ?
(6) As Mr. Cartwright's financial adviser, would you recommend to him to go ahead with
his anticipated expansion and his plans for additional debt financing ? Why or why not ?
(7) As Mr. Dodge, would you approve the line of credit requested by Mr. Cartwright ? If
so, why, and at what conditions ? If not, why ?
SESSION 13 (MAY 2)
Topics and readings
Same as for session 12.
SESSION 14 (“MAKE-UP” DATE FOR MAY 9, WHICH IS AN OFFICIAL
HOLIDAY)
FOURTH WRITTEN ASSIGNMENT DUE (SEE UNDER “CASE” BELOW)
Topics.
(a) Acquisitions and mergers in financial services management.
(b) Summary and conclusions of the course.
Readings
Chapter 19 of the textbook.
Syllabus:
ECN 223E – The International Banking System
Spring 2013
17
Case
“Santander’s acquisition of Abbey: banking across borders” (Harvard Business School 9707-485).
This case is very interesting, for it illustrates (i) the concentration taking place in the
European banking industry, and (ii) a very important cross-border acquisition.
You should answer the questions assigned “specifically, completely, clearly and
convincingly”. This means that your paper must be at least one page long (“single
spacing”).
You should write your analysis, your opinion, your conclusions, etc. Do not be shy !
Please write “I believe/feel/etc.”, or “in my opinion”, or “according to me”, or etc.
There is enough information in the case to answer the questions assigned.
Consequently, please do not make any research on Banco Santander or on Abbey
National. In addition, please do not look for analysis or studies made on these two
banks or on this acquisition. I will not take into account any information or analysis
or opinion based on such a research.
The questions to answer for this assignment are as follows:
For the students whose family name begins with a letter from A to G
Please assume that you were a shareholder of Banco Santander at the time of the
announcement of its acquisition of Abbey National. What in your opinion were the main
advantages and the main disadvantages of this acquisition for you ?
For the students whose family name begins with a letter from H to P
Please assume that you were a staff member of Abbey National at the time of the
announcement of its acquisition of Abbey National. What in your opinion were the main
advantages and the main disadvantages of this acquisition for you ?
For the students whose family name begins with a letter from Q to Z
Please assume that you were a client of Abbey National at the time of the announcement
of its acquisition of Abbey National. What in your opinion were the main advantages and
the main disadvantages of this acquisition for you ?
SESSION 15 (MAY 16)
FINAL EXAMINATION.
Jean Bellemans
January 13, 2013
Syllabus:
ECN 223E – The International Banking System
Spring 2013