Recent turbulence in financial markets has provided students on the new MSc Banking and Finance course at the University of Leicester with a rare opportunity to gain insights into the real-life world of modern banking.
Professor Panicos O. Demetriades, who lectures on Principles of Banking, has not missed this opportunity. He has used recent events to demonstrate to his students the importance of key banking concepts, such as bank runs, illiquidity, insolvency, financial contagion, financial distress, deposit insurance and the central bank’s lender of last resort function.
“It is a long time since the UK witnessed a fully fledged bank run – depositors queuing up to withdraw their funds from a bank – as was the case in the Northern Rock crisis,” Professor Demetriades explained. “Northern Rock had to ask the Bank of England for emergency funding in order to continue operating.
“This was the first time in many years that the Bank engaged in lender of last resort operations, and it appeared as though the Bank may have forgotten how to do it. The emergency lending operation seemed to be a rather reluctant one, fuelling fears of Northern Rock collapsing, which exacerbated the bank run.
“The distinction between illiquidity and insolvency came to the fore when the Financial Services Authority – the UK’s financial regulator – repeatedly insisted that Northern Rock is a good quality company that exceeds its capital requirements. Bank capital is the buffer which protects banks from failing when they are faced with bad loans, which they have to write down in their balance sheets.
“However, these reassurances seemed insufficient to Northern Rock depositors who continued to withdraw their deposits, reflecting anxieties about the inadequacy of the UK’s deposit insurance scheme - which provides protection for depositors of up to 90% of their deposits but only up to the value of £35,000.
“The bank run died down only when Chancellor Darling pledged to guarantee all bank deposits at Northern Rock. The crisis also illustrated the role of financial contagion – the transmission of financial shocks between institutions and across banking systems. Northern Rock’s problems seem to have at least partially originated in the US, where the recent decline of the housing market created solvency problems in the sub-prime mortgage market."
Professor Demetriades’ teaching is backed by an international reputation in research in the area of financial economics. He is widely cited for his numerous contributions to the literature on the relationship between financial development and growth, the consequences of financial repression and liberalisation and the causes of the Asian financial crisis of 1997-98.
Currently he is leading an international inter-disciplinary group of researchers on an ESRC-funded project entitled ‘National and International Aspects of Financial Development’. Some of the project’s output is already appearing in prestigious international journals.
An article in the latest issue of Journal of Development Economics, co-authored by Svetlana Andrianova and Anja Shortland, puts forward a novel model of banking to examine the influence of deposit contract enforcement in explaining the share of government owned banks in the banking system.
It predicts that the share of government-owned banks is higher in countries where regulatory institutions are weak and which experienced banking crises in the past. The article shows that government ownership of banks is frequently a symptom of depositors’ mistrust of private banks, as for example is still the case in Russia.
The paper also provides empirical evidence, using data from a large number of countries, which is supportive of its theoretical predictions. Moreover, the evidence presented also suggests that weak institutions are relatively more important determinants of the share of state banks than political motives.
In turning on its head the popular case that politically motivated state banks are the causes of many banking crises, Professor Demetriades and his coauthors show, yet again, that Economics at Leicester is at the forefront of their field, applying a fresh look and original thought to the world of finance.
The Department has achieved maximum scores in government assessments for both teaching and research, and number one status in the inaugural National Student Survey.
Academic staff in the Department are widely consulted by government agencies around the world and by institutions such as the IMF, OECD and the World Bank, as well as commercial and financial organisations and the media.
This level of expertise gives departmental teaching both relevance and immediacy, and international economic incidents are incorporated into teaching almost as they happen.
Source: By University Of Leicester