Msc Banking and Risk

PG BoS 22June11 – Paper A1

MSc Banking and Risk

Programme Proposal

Introduction

This document proposes the creation of an MSc in Banking and Risk degree which would have its first intake in September 2012. The Programme is initiated by the BusinessSchool. This document should be read in conjunction with the Degree Programme Specification document.

Programme Content

1Academic Strategy

Core Vision of the Programme

The vision of the Programme is to give a student knowledge, understanding and key skills that enable him/her to be an effective manager in a financial institution, especially a bank, in any country of the world.

Recent events demonstrate that the successful management of banks is of crucial importance to western economies. Banking is essentially an industry rather than an academic discipline and the study of the management of banks is multidisciplinary. The approach of this degree is to consider the structural, financial and risk and asset management functions of banks.

Whilst there are many MSc degrees involving banking offered in the UK, the vast majority provide descriptive material about what banks actually do. The Edinburgh experience differs from the majority of offerings in that it has a major emphasis on what decisions managers in banks should make and how to make them. Therefore several of the courses and the course structure are very different from the majority of Programmes on the market. The course has been designed by asking the question ‘what skills do managers in risk functions have to know to be technically excellent at their job?’ rather than by asking the question ‘what can our current staff teach to students of banking ?’.

This MSc utilises and relies on knowledge and skills gained through the research that is carried out by members of the Credit Research Centre (CRC) in the BusinessSchool. This is a world leading research centre that specialises in research into credit risk modelling. The Centre is somewhat unique in the large number of researchers in the credit risk area. The Centre also provides a highly conducive environment in which to study risk management in banks because it runs the largest research oriented conference on credit scoring and credit control in the world biennially, and much of the research literature in the area is at some time presented at the conference. The Centre also has a seminar series and plans high impact conferences in the near future. It also provides scholarships for doctoral research and has a full time Post-Doctoral Research Fellow. The Centre has extensive connections with many multinational banks.

Degree Structure

The structure of the degree, including the number of SQCF credits for each course, and in total, and the timetabling is given in Table 1. The Programme progresses sequentially; the courses in Semester 1 give the student knowledge, understanding and skills that are needed to benefit from the courses taken in Semester 2. The core courses give generic understanding and skills that a student with this degree must gain. The option courses allow for specialisation either in the risk assessment areas (Risk management and the Basel Accords and Datamining and / or Microfinance) or in the asset management areas (Investment Management and Derivatives) or a student may take a course from both areas. The dissertation, which must be on a topic related to Banking or Risk, allows a student to research a specific topic by either collecting data to test hypotheses, carrying out a literature review or undertaking a project for a financial institution.

The degree will be externally examined by an academic specialist in banking. There is no SHEFC Benchmark that applies to this degree.

Quality Assurance

The Director of the Programme will monitor on an ongoing basis the quality of teaching being provided. In addition annual QAA reports will be provided to the BusinessSchool’s Director of Quality for each course which will include the views of the staff teaching on each course, a summary of student feedback, a summary of the views of the external examiner and any planned improvements for the following year.

Synergy and Comlimentarity

The MSc will add to the portfolio of Masters degrees in the area of Financial Services. The School has chosen Financial Services as an area it wishes to develop given the location of the BusinessSchool in one of Europe’s most significant financial centres that is home to the headquarters of some of the world’s largest banks and insurance companies.

This degree complements both current MSc degrees, the areas of research of current doctoral students and the research carried out in the Centre. The new Programme complements the current MSc degrees in Accounting and Finance and in Finance and Investment and two other proposed Masters degrees in the Finance area as well as the MSc in Marketing and Business Analysis. Synergy exists in the form of shared courses and shared technical skills of the staff teaching them. For example the proposed degree shares four courses with the Masters degrees in the Finance area it shares two courses from the Masters in Marketing and Business Analysis. Students on the Masters courses in Finance would be welcome to take the new option courses (by permission of both MSc directors). Students on the new MSc will be expected to attend the Centre’s research seminars.

This is a new degree and does not replace another.

Entry Requirements

The minimum entry requirements will be an upper second class honours degree (or its equivalent) in a subject with a quantitative component for example: Economics, Finance, Mathematics, Statistics, Physics, Management Science/Operations Research. Candidates with an upper second class honours degree in Accounting or Business with successful completion of at least one statistics course will be considered on an individual basis.

Minimum English language test scores will apply.

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PG BoS 22June11 – Paper A1

Table 1: Structure of Proposed MSc Banking and Risk Degree

A&F denotes Accounting and Finance; MSBE denotes Management Science and Business Economics

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2. Market Analysis

The intended market consists of people with a quantitative training in Economics, Finance, Mathematics, Statistics, Management Science, Operations Research or Accounting or Business with some statistics courses who wish a career in retail banking, investment banking, a rating agency, an investment fund management company or in a credit risk consultancy. Adding the knowledge and skills provided by this degree would make people with quantitative skills exceptionally desirable by these types of institutions. For example the Credit Research Centre is often asked by some of the world’s largest banks if we have any good students graduating. Our PhD students with theses in credit risk are also in high demand by potential employers.

To examine available provision every pre-1992 UK University has been examined to discover details of any MSc degrees relating to banking or other aspects of the proposed degree was carried out. Table 2 show a frequency distribution of MSc degrees by title. Appendix 1 shows the raw data. These degrees were offered by 25 Universities; 16 were a Business or a ManagementSchool, 8 were an Economics department and one was a department of Chinese studies.

Table 2

Frequency Distribution ofMSc Degrees Involving Banking Offered By Pre-1992 UK Universities

An examination of six of the most distinguished US universities revealed that there were no MSc degrees in banking offered by any of the following: New York University, Columbia, Princeton, Harvard, MIT or Chicago.

We restrict discussion to the UKuniversities above. MSc degrees involving banking can be classified into those provided by

1. Departments of Economics which are characterised by

• teaching material ‘about’ banking and macroeconomics or simply about banking and about finance;
• teaching essentially descriptive or explanatory material for example what explains the structure of the banking industry; how does changes in banking policy affect the macroeconomy;
• requiring an upper second class honours degree in Economics for entry.

2. Business or Management schools which are characterised by

• teaching material that is generally ‘about’ banking;
• generally not specialising in risk analysis;
• require an upper second class honours degree in a quantitative subject e.g. Economics, Finance or Mathematics (about 50% of schools) or an upper second in any subject (about 50% of schools).

Our examination showed there were

• no programmes with the title‘Banking and Risk’;
• very few programmes dedicated to teaching what those who manage banks should do rather than what banks actually do;
• no programmes that specialised in financial risk analysis without being very very mathematical;
• no programmes that specialised in the types of risk that banks face: interest rate risk, credit risk, market risk andoperational risk.

We also noticed that, in general, Programmes that did teach techniques for making decisions, especially the quantitative ones, could charge relatively high fees.

To examine the factors that affect the fee levels charged we collected data on fees charged, whether the supplying School offered an MBA that was in the FT 100, the proportion of outputs of the supplying school given a grade of 3* or 4* in RAE2008, whether the title of the degree suggested it involved an analysis of risk and whether the degree was offered by a Business School or an Economics department. We then econometrically modelled the non-EU fee level in 2011-12 charged across the schools. This analysis was merely exploratory and was complicated by correlations between these variables. We found that it was more appropriate to estimate the model for Business Schools only: 16 cases. The results suggested the marginal effects shown in Table 3 (full details available on request):

Table 3

Marginal Effects in a Non-EU Fee econometric equation

Ref: market analysis\m1.log

The estimated model explained 80% of the variation in fees across schools. As a caution,each fee is not the highest fee any student is willing to pay, but is the fee at which in the long run supply equals demand. Nevertheless the results are useful in helping to decide a fee for our product.

Experience of previous MSc proposals indicates that increased mathematical rigor reduces demand. On the other hand reference to ‘risk’ or more mathematical concepts in the degree title are associated with higher fees (see Table 3). The proposition is therefore to offer a degree that is relevant and moderately mathematical to attract high fees, but not overly so as would dissuade customers from buying.

In choosing a fee we take into account the following factors: the prediction of the equation above (£19,400), that the degree will be giving students knowledge and skills to make decisions rather than giving them a knowledge of verified explanatory hypotheses, that the Business School has a world wide reputation for credit risk modelling research, that the CRC has excellent connections with some of the world’s largest banks allowing us to have lectures by practitioners and practical dissertation topics, that the School has an impressive building and the attraction of Edinburgh as a place to live. We also take cognisance that we have no previous intakes onto the degree with which to estimate demand.

The proposed fees to be charged and the expected intake are shown in Table 4.

Table 4

Expected Intake

Rival products that charge a fee just above and just below our proposed fees are shown in Table 5

Table 5

Nearest Rivals by Fees

Most of those MSc degrees that charge a higher fee are offered by schools with a higher RAE score or a product with Risk or ‘Investment Banking’ in the title. Those charging lower fees offer degrees without ‘Risk’ or high value banking in the title and that do not concentrate on teaching skills to make better risk management decisions.

Figure 1 shows a plot of our fee against RAE score and shows it to be reasonable in this dimension. Fee-RAE combinations in the lower right corner represent less value for a customer who would prefer to be in the top left hand corner. For a degree from a school with a given research record a potential student would prefer to pay a lower fee (all other aspects of the degree being the same).

Gaining information about student intakes from competing suppliers of MSc degrees is difficult. However, expected student numbers are based on our knowledge of the number of students taking certain other MSc Banking degrees ( Imperial College 108; Cass: 85; Strathclyde: 25) and on the number of students that have enrolled on not too dissimilar degree programmes in our own School (MSc Finance and Investment: 75 students; MSc Accounting and Finance 55 students). In the financial projections below we present a sensitivity analysis of deviations from the expected number.

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3. Resource Issues

Financial projections

The financial projections for the Programme are computed using the School’s Proposed New Programmes Template. All costs, both fixed and variable, are included and predicted variable costs and predicted revenue are determined by the chosen fees and predicted student intake. Tables 6a, 6b, and 6c show the predicted revenues, costs and surplus in each of years 0 (2011-12) to 3 (2014-15), for an expected, a pessimisticand an optimistic scenario, respectively. The student numbers and fees are as justified above.

The Expected outcome (Table 6a) shows the Programme is expected to yield £150k, £208k and £271k in each of years 1 to 3 for the hire of additional faculty. The gross cost of a Lecturer at current prices is approximately £71k pa so the Programme is expected to provide enough financial resource to hire two full time faculty for the beginning of 2012-13, a third faculty member in the following year and a fourth in the following year. The expected scenario provides funds for the four faculty to be retained as long as the Programme runs. In addition the Programme is expected to earn a surplus for the School of just under £5k pa from 2014-15 onwards after all other costs have been subtracted.

Table 6b shows the implications of the unlikely event of receiving 25% fewer EU and 25% fewer non-EU students at the chosen fee rates. In this case the Programme will yield enough financial resource for one fewer posts in each year and so sufficient for three faculty members in 2014-15 onwards. Equally likely is that the outcomes shown in Table 6c occur where there is an intake 25% above the expected levels. In this case the Programme yields enough resource for almost three faculty in the first year of operation rising to almost five members from 2014-15 onwards. In addition the Programme will yield about £21k pa to the School after all other costs have been subtracted.

Table 6a

Expected Outturn

Table 6b

Pessimistic Outturn

Table 6c

Optimistic Outturn