BEAM033 BANKING AND FINANCIAL SERVICES

FINAL ASSIGNMENT

TASK 1 (1,500 words)

Scenario:

The global economy is transitioning through a critical phase, navigating the "last mile" of disinflation. This period presents unique challenges for monetary policymakers striving to balance  price stability, economic growth, and employment.  Persistent  risks  of  underlying inflation, tightening financial conditions, and vulnerabilities in the global financial system add to the complexity of this endeavour.

Commercial banks and institutional investors play a crucial role in shaping the international financial  landscape,  but  their  operations  are  influenced  by  factors  such  as  credit  supply constraints, adverse selection, and moral hazard. Meanwhile, the global monetary tightening cycle raises questions about its impact on developed and emerging markets, and the lessons it holds for future policy interventions.

In this context, sustainability and ethical dimensions have become key considerations for both policymakers and financial institutions. The integration of green finance principles, along with the adaptation of regulatory frameworks, is increasingly viewed  as essential for fostering financial stability and promoting long-term growth.

Your Task:

Drawing on the scenario above, you are  required to critically analyse the  intersection  of financial institution operations, monetary policy, and financial stability, with a focus on the challenges of disinflation. Your analysis should integrate theoretical concepts, quantitative and qualitative insights, and ethical considerations, applying them to real-world issues.

Questions:

1.   Commercial Banking and Institutional Investors (10 marks)

•    How do commercial banks and institutional investors respond to the tightening financial conditions associated with the last mile of disinflation?

•   Critically appraise their role within the international financial system during this period.

2.   Adverse Selection and Moral Hazard (10 marks)

•    How  do adverse selection and  moral hazard  manifest in banking and financial services during periods of economic uncertainty?

•    Evaluate how ethical considerations influence the decision-making processes of banks and institutional investors.

3.   Monetary Policy and Financial Stability (10 marks)

•   Analyse how global monetary tightening affects credit availability, money supply, and interest rates, and its impact on the lending decisions of commercial banks and the borrowing behaviour of businesses and consumers.

•   Critically assess the effectiveness of  monetary  policy  in  mitigating  bank-based financial crises, focusing on how central banks have used monetary tools during recent financial instability and lessons for future policy interventions.

4.   Green and Sustainable Finance (10 marks)

•    How can green and sustainable finance principles guide decision-making within financial  institutions  to  address  financial  vulnerabilities,  promote  long-term stability, and manage associated risks?

•    Provide actionable recommendations for integrating sustainability into monetary and  banking  policies,  or  within  the  operations  of  financial  institutions,  with reference to  relevant  regulatory  frameworks,  and  managing  the  related  risks effectively.

5.   Real-World Analysis (10 marks)

•   Conduct  independent  research to  evaluate the challenges and  responses  of a developed economy (e.g., the US, UK or the Eurozone) and an emerging market economy (e.g., China or India) during this phase of disinflation.

•   Compare their monetary policy responses and evaluate the lessons they offer for global financial stability.

[Total 50 marks]

TASK 2 (1,000 words)

Answer only one topic from the following list:

TOPIC 1: INSURANCE COMPANIES

a.   Select a publicly traded insurance company of your choice. Go to its website and retrieve its  most  recent  annual  report  or  use  any  other  related   information  to  answer  the following questions.

i)   Provide  an  overview  of the  company’s  business  model,  including  its  main  lines  of

insurance and how it functions as a financial intermediary. Discuss its asset allocation

strategy and explain how this supports the company’s risk management practices.   (10 marks)

ii) Analyse the company’s performance over the past five years compared to industry norms.  Identify  the  key  factors  influencing  this  performance,  including  how  the company has managed emerging risks in the insurance sector.   (10 marks)

b.   Discuss  the  impact  of  risk  classification  on  economic efficiency.  Evaluate  how  pricing based on risk classification benefits or disadvantages insurers, policyholders, and society as a whole. Additionally, explain how insurers balance these pricing strategies with the need to manage underwriting risk.  (10 marks)

c.    Explore the  role of the Net-Zero Insurance Alliance or similar initiatives in promoting

sustainable  practices  within  the   insurance   sector.  Provide  an  example  of  a  green

insurance product or service offered by your chosen company in question a (or another

company), discussing its contribution to climate risk mitigation and sustainability goals.  (10 marks)

TOPIC 2: PENSION FUNDS

Choose a pension fund from your selected country.

a.   Examine the factors that influence the performance and sustainability of the pension

fund,  with   a  particular  focus   on  how  changes  in  workforce  demographics,  global

economic trends, and evolving regulatory frameworks affect its long-term viability.   (10 marks)

b.   Discuss the role of governance within the pension fund’s operations. What measures has the fund taken in recent years to improve transparency, accountability, and alignment with shareholder interests?                                                                                          (10 marks)

c.    Imagine that the pension fund is currently facing a significant shortfall. As an advisor to the fund, propose a set of actionable steps to reduce the risk of underfunding in the future and ensure the fund can meet its obligations.                                              (10 marks)

d.   Investigate   the  opportunities  and  challenges  related  to  the  pension  fund’s  green investment strategy. How do global sustainability goals influence the fund’s investment decisions, and what are the trade-offs between sustainability, financial returns, and risk management?                                                (10 marks)

TOPIC 3: MUTUAL FUNDS

a.   Select   a  mutual  fund  from   a  developed   or  emerging   market,   and  analyse   its  key investment strategy, objectives, risks, and expected returns. Use its prospectus or any other related information to answer the following questions.

i)  Assess  the  fund’s  risk-return  profile  and  identify  the  main  factors  that  drive  its performance.  How  do  market  conditions  (e.g.,   interest   rates,  economic  growth, inflation) impact its returns?         (10 marks)

ii)  Given the current macroeconomic environment, would you advise investors to hold, buy,  or  sell  shares  in  this  fund?  Provide  a  clear  justification  based  on  economic indicators, market sentiment, and the fund’s strategy.                                     (10 marks)

b.   Explain  why  investors  may  choose  to shift their  investments from equities to  money market funds during periods of market uncertainty. Discuss the implications of this shift for mutual fund managers and the overall performance of the mutual fund industry.   (10 marks)

c.    Propose  strategies for  mutual fund  managers to  integrate environmental, social, and governance (ESG) criteria into their investment portfolios, and discuss the key challenges they may face in implementing these strategies. How can these challenges be overcome?   (10 marks)

TOPIC 4: COMMERCIAL BANKS

a.   Download the most recent annual reports of two prominent banking groups.

i)  Analyse and compare the key performance indicators of two major commercial banks over the past five years. How do these indicators reflect their operational efficiency, profitability, and risk management practices?   (10 marks)

ii)  Examine   how    each    bank’s   approach    to   liquidity    management,    asset-liability management, and capital adequacy aligns with current global regulatory standards (e.g.,  Basel  III).  Discuss  any  potential  risks  or  challenges  each  bank  might  face  in maintaining these standards during economic downturns.    (10 marks)

b.   Discuss the impact of technological innovation on commercial banks’ traditional business models.  How  can  banks  manage  the  risks  associated  with  these  innovations  while capitalising on them for long-term profitability? Provide a real-world example or case study of a commercial bank that has successfully incorporated digital transformation or technology-driven solutions to enhance its operations.   (10 marks)

c.    How can commercial banks contribute to the financing of sustainable development goals (SDGs)?  Identify  specific  policies  or  practices  implemented  by  banks  in  your  chosen country  that  support  green  and  sustainable  finance.   Provide   recommendations  for enhancing these efforts.   (10 marks)

TOPIC 5: CENTRAL BANKS

a.   Investigate the monetary policy implemented by the central bank of your chosen country over the past five years. How has the central bank’s approach to interest rates and its tools to influence market liquidity addressed key economic challenges such as economic slowdown and debt  levels?  Compare this with the  policy  actions of the  U.S.  Federal Reserve and discuss their implications for global markets.  (20 marks)

b.   Discuss  the  concept of  'quantitative tightening'  (QT) and its potential impacts on the economy. How might central banks implement QT to reduce the money supply, and what challenges could arise in terms of inflation control and market stability?  (10 marks)

c.    Investigate how central banks are incorporating sustainability into their monetary policy and regulatory practices. Focus on a specific central bank’s actions in integrating climate- related risks into its financial stability framework. What further steps can central banks take to foster sustainability in the financial sector and strengthen resilience to long-term risks?   (10 marks)

[Total 40 marks]