FACULDADE DE ECONOMIA
UNIVERSIDADE NOVA DE LISBOA
2206 Banking
1st Semester 2007/2008
Masters in Business and Finance
Instructor: Paulo Soares de Pinho
Short Biography:
Lic. Economia (UNL); MBA (UNL); PhD Banking and Finance (Cass Business
School). Associate Professor (UNL); Coordinator of the Post-Graduate Programmes in
Finance and in Law and Management; Former Director of the MBA Programme
(UNL). Senior Advisor at Profit Technologies Inc (USA) and Venture Valuation
(Zurich); President of the General Council of Fundo de Sindicação de Capital de Risco.
Contacts: email: pjpinho@fe.unl.pt
COURSE AIMS
This course is devoted to the management of commercial banks. It aims to help students to understand the
main strategic issues in retail banking and the risks and regulations faced by the industry. Particular
emphasis are made on customer-focused banking, integrated risk management, interest-rate risk, market
risk, capital allocation, value-based measurement, credit risk and its pricing.
Target audience: participants with a strong interest in banking, financial risk management and business
consultancy.
LEARNING OBJECTIVES
A. Knowledge and Understanding:
 Why banks are different
 Understanding banking risks and their regulation
 Understanding bank financial statements
 Bank value and its determinants
 Banking strategies and organisation
 Value creation and destruction in banking
 Risk and return in banking markets and activities
 Integrated risk management within financial institutions
 Risk measurement and management
 The use of derivatives for hedging and leveraging of banking risks
 Bank capital requirements (economic and regulatory) and management
 Credit risk evaluation and pricing
B. Subject-Specific Skills:
 Analysis of banking companies and markets
 Analysis and evaluation of banking risks
 Measuring and managing interest-rate risk
 Market risk measurement
 Performance analysis of banking activities using a risk-return framework
 Credit risk evaluation and analysis
 Pricing credit risk
C. General Skills:
 Analysis of the financial performance of complex organisations
 Analysis of customer relationships
TEACHING AND LEARNING METHODS
Students are expected to:
Attend classes and actively participate in discussions
Get actively involved in group analysis of the case-studies
Make oral presentations of their reports
Devote to home-study about 2 hours per class
ASSESSMENT
Group (3 people per team) solution of the case-studies (3 reports): 35%
Financial analysis of a bank
Caja España: Managing the Branches to Sell (A), Harvard (9-104-044)
Basel II: Assessing the default and loss characteristics of project finance loans (A), Harvard
(9-203-035)
Final Exam: 50%
Class participation: 15%
Minimum exam grade: 9.5
COURSE CONTENT
1. Overview of Commercial Banking
1.1 Banking: Functions, Risks, Regulation and Supervision
1.2 A strategic overview of the retail banking industry
1.3 Relational banking
1.4 Analysis of banks’ financial statements
1.5 Bank Mergers
Case-studies: Customer Profitability and Customer Relationship Management at RBC Financial
Group, Harvard (9-102-072)
The Royal Bank of Scotland: Masters of Integration, Harvard (9-404-026)
Readings: lecture notes, SC chpts 1, 2, 7, 21, 22, 23.
2. Risk Measurement and Management
2.1 Introduction to Asset and liability management (ALM)
2.2 Liquidity risk
2.3 Interest Rate Risk
2.4 Operational Risk
2.5 Market Risks – Introduction to value at risk (VaR)
2.6 Interest rate instruments: FRA’s and interest rate swaps (IRS)
2.7 Capital Regulations: Basel I and II
2.8 Securitisation of Bank Loans
Readings: SC chpts 8, 9, 14, 17, 18, 20, 24, 26, 27, 28.
Case-study: Banc One: Asset and Liability Management (9-924-079)
3. Risk, Capital Management and Value-Based Management in Banking
3.1Capital regulation in banking: From Basel I to Basel II
3.2 Market risk: An introduction to value at risk (VaR)
3.3 Economic capital
3.4 Pool of funds concept and funds’ transfer pricing
3.5 Measuring Performance: RAROC and EVA
Case-study: Customer profitability analysis and value-based management at Barclays Bank
(INSEAD 105-001-1)
Readings: SC chpts 10, 20, 24, 25, 26; Economics of Retail Banking Note, Harvard (9-602-153);
Bessis, chpts 26-27 and 53-54.
4. Credit Risk Management and Pricing
4.1 Credit risk: principles
4.2 The options approach to credit risk
4.3 Adverse selection, credit rationing and credit risk evaluation
4.4 Valuation of credit-sensitive securities: risk-aversion and default
4.5 Binomial credit risk models and pricing
4.6 Introduction to credit derivatives
Readings: SC chpt 11,12,13 and lecture notes.
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BIBLIOGRAPHY
Main textbook:
Saunders and Cornett (SC) Financial Institutions Management: a risk-management approach, 5th ed,
McGraw-Hill (2005).
A useful more advanced book is:
Bessis, Joel Risk Management in Banking, 2nd ed, Wiley (2002).
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RESOURCES
Course web page: http://docentes.fe.unl.pt/~pjpinho
Powerpoint slides available at the course page