Courses

    Risk in the international financial system is managed by market participants' own risk controls; through multilateral clearing and payments systems; by government regulation and supervision of financial institutions; through international coordinating bodies of these national regulators; and by multilateral organizations such as the IMF and World Bank. How these private and public sector entities interact to create the risk management framework for the system as a whole will be the focus of this seminar. These issues will be explored through three recent but distinct international financial crises---the sovereign debt crises of the 1980's and 1990's, the Long-Term Capital Management (LTCM) hedge fund crisis in the late 1990's, and the "Sub-Prime" credit market crisis of 2007/2008.

In each case, the risks which arose in particular financial instruments or markets spread more widely to create systemic risk. Defaults by governments on international and domestic debt, as well as government-imposed exchange or capital controls preventing the timely payment of private sector debts, were sovereign risks that threatened the stability of the international banking system and global economy for close to two decades. The LTCM Crisis presented a new and different set of risks to the international financial system via highly leveraged unregulated hedge funds active in markets for new complex financial instruments. Risk management by market participants such as banks, investment banks and borrowers, and the efforts of policy officials, domestic and international institutions, such as the IMF, to oversee markets to prevent and limit systemic risk, will be discussed in relation to each of these episodes.

Most recently, the Sub-Prime Crisis -- which originated in the US residential mortgage market and led to a broader banking and credit crisis internationally -- is presenting new questions about the adequacy of bank and investment bank risk management systems, as well as the effectiveness of the current regulatory regimes(the role of the Basel bank capital standards in contributing to the crisis, the role of credit rating agencies, the adequacy of international regulatory coordination and of the authority of the Financial Stability Forum and of the IMF to provide an early warning system for systemic risks).

The class will be limited to 20 students and will involve classroom participation and short written assignments. There will be a final take-home exam.