BEAM033 Banking and Financial Services Assessment Brief | UoE

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 

• 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 

• 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

• 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

• 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 

• 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.

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.

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.

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.

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.

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.

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?    

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.

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?

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?    

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.

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.

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?

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?

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.

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.

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.

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.

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?

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?