Topics to be covered include: the analytics of a financial crisis - the Great Depression; bank runs and the current financial crisis; case studies: Bear Stearns and Lehman Brothers; funding, interest rate and currency risk, and liquidity crises; bank resolution; modelling risky debt, systemic risk and default; VaR, CoVaR and other risk measures; elements of term structure of interest rate models and hedging applications; housing, mortgages, and the subprime market; the Goodhart-Tsomocos Model of Financial Fragility, and measure of systemic risk; the sovereign debt crisis and the Euro area bailout.

Preliminary Syllabus

Session 1

Course Introduction

The Analytics of a Financial Crisis: The Great Depression

· Basic facts on output, prices, labour markets

· Hypothesis about causes

· The role of financial factors

Essential Reading

Bernanke, B. and James, H. (1991) “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison”, chapter in Hubbard, R.G. (ed.) Financial Markets and Financial Crises, University of Chicago Press, pp.33-68.

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The Economist, Financial Crises: The Slumps that Shaped Modern Finance, Essay.

Freidman, M. (2006) “Why Money Matters”, Wall Street Journal, 17^th Nov., A.20.

Case Study

To be handed out in class.

Session 2

Bank runs and Bear Stearns

· The Diamond-Dybvig Model

· Bank Runs

· The Demise of Bear Stearns

Essential Reading

Diamond, D.W. (2007) “Banks and Liquidity Creation: A Simple Exposition of the Diamond-Dybvig Model”, Economic Quarterly 93(2):189-200.

Wessel, D. (2010) “Unusual and Exigent”, chapter 9 in In FED We Trust: Ben Bernanke's War on the Great Panic, Three Rivers Press, pp.147-175.

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Case Study

To be handed out in class.

Session 3

Lehman Brothers and the Financial Crisis of 2007-09

· Lehman Brothers

Sources of trouble and options

Run Dynamics

Controversial Decisions

Policy Decisions and fallout

· Effects on credit availability

· Post Lehman problems

· SpinCo – Bank Resolution Regimes

Essential Reading

Duffie, D. (2010) “The Failure Mechanics of Dealer Banks”, Journal of Economic Perspectives, 24(1):51-72.

Wessel, D. (2010) “Let Ol’ Lehman Go” and “Breaking the Glass”, chapter 1 & 11 in In FED We Trust: Ben Bernanke's War on the Great Panic, Three Rivers Press, pp.9-26 & 118-126.

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Friedman, M. (1998) “Reviving Japan”, Hoover Digest, 1998:2, Asia.

Greenlaw, D., Hatzius, J., Kashyap, A.K. and Shin, H.S. (2008) Leveraged Losses: Lessons from the Mortgage Market Meltdown, Proceedings of the U.S. Monetary Policy Forum 2008, U.S. Monetary Policy Forum Report No. 2. Rosenberg Institute, Brandeis International Business School and