1 1 Contact Details for Professor VESALIUS COLLEGE Spring Term 2013 Course Syllabus: ECN 223E THE INTERNATIONAL BANKING SYSTEM Tel: (02) GSM: (0477) (only in emergencies) Office hours and location: Thursdays, a.m 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
2 2 (A) Textbook Bank Management and Financial Services (Peter Rose, Sylvia Hudgins) (McGraw-Hill, ninth edition, 2012, ISBN ). (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 ). (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 ). (7) "Bank of America-Merrill Lynch" (Harvard Business School ). (8) Introduction to derivative instruments (Harvard Business School ). (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 ). (14) "Santander's acquisition of Abbey: banking across borders" (Harvard Business School ). (C) Documents handed out separately
3 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 Scale of 20 Scale of 100 A A B B B C C C D D F Below
4 4 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.)
5 5 Session Day 1 January 24 2 January 31 3 February 7 4 February 14 (deadline for the submission of the first written assignment) 5 February 21 6 February 28 (deadline for the submission of the second written assignment) 7 March 7 (deadline for the submission of the papers for the take-home midterm examination) 8 March 14 9 March March 28 (no session on April 4 and 11: spring recess) 11 April 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 before that session. ****************** The written assignments are described in this syllabus. They are due as follows: Number Session Topic 1 4 Currencies/foreign exchange 2 6 Key metrics" of banks 3 12 The case Cartwright Lumber Company 4 14 The case Santander s acquisition of Abbey: banking across the borders
6 6 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: (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: (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: (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.
7 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.
8 8 The links on the subject of the SDR are as follows: Definition of the SDR Present composition of an SDR Daily SDR valuation Exchange rates against the SDR ********************** 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. *****************
9 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 ). 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 ).
10 10 SESSION 4 (FEBRUARY 14) FIRST WRITTEN ASSIGNMENT DUE Assignment Please prepare the following table of "cross spot rates": EUR EUR GBP CHF USD JPY AUD 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, 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, 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, Sources of information You should obtain the information necessary to answer this question from the following web site of the Financial Times: 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: 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". ***********************
11 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: , and not 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: DEM/EUR: FRF/EUR: IEP/EUR: ITL/EUR: 1, NLG/EUR: 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.
12 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 erslag_2011_en.pdf Students whose family names begin with a letter from H to P: Citigroup Inc. The K (annual) report is available at 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 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, 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.
13 13 ********************* Topics and readings Same as for session 5. SESSION 7 (MARCH 7) DEADLINE FOR THE SUBMISSION OF THE PAPERS FOR THE "TAKE- HOME" 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 ). 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 ). SESSION 9 (MARCH 21) Topics and readings Same as for session 8.
14 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 ).
15 15 Note There are excellent flash animations on letters of credit/documentary credits and on bank guarantees/bonds at: Case "Cartwright Lumber Company" (Harvard Business School ). 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, Important remark: please make the following assumptions for 2004 and for December 31, 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 ********************
16 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.
17 17 Case Santander s acquisition of Abbey: banking across borders (Harvard Business School ). 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