How research at HEC Paris expands students’ knowledge of financial regulation

September 16th, 2016

Academic research at HEC Paris is hugely important in shaping how the school teaches about financial regulation. Lecturers bringing real-world examples into the classroom means students graduate with invaluable knowledge – and are more likely to wow employers. 

Etudiants Arche

If you open the Financial Times or Wall Street Journal  today, chances are one in five articles will be directly linked to (tougher) financial regulation, whether it be stricter constraints applied to banks, other financial institutions, or their industry clients and how they adapt to them. Throw in the numerous financial scandals whereby banks and other institutions have had to cough up billions of dollars in fines, and many employers in banking and finance increasingly want their staff to have in-depth knowledge about these rules, not to mention the cost of violating them. This is where HEC Paris’ Masters in Finance’s dedicated module on Financial Regulation kicks in. 

After the financial crisis in 2008, there was a huge overhaul of regulation. Many employees working in finance failed to understand the issues and processes at stake, as it had not been part of their study curriculum. Almost ten years on, this has changed. "People talk about financial regulation all the time and if you want to be part of the debate, sound clever in an interview or simply do your job properly, you need to have some understanding of it," explains Jean-Edouard Colliard, the Assistant Professor who developed and teaches the module.

For Colliard it is vital to prepare his students, who will typically work for an investment bank or an asset management firm, on how financial regulation will shape their daily challenges. At the start of his course his students are often discovering the topic for the first time, only knowing keywords they have gleaned from newspapers. "Some are scared it comprises a list of don’ts (for instance don't take too many risks), but this is not at all the approach of the course.” explains Colliard, “Instead I teach why these regulations are there in the first place, and which underlying “philosophy” drives them – this also helps the students to follow up with the quick pace of regulatory updates once in the workplace.” 

The approach is twofold: positive (overview of the actual regulation and regulatory processes) and normative (discussion of what an optimal situation could be). Some students are somewhat cynical and view regulation as a constraint on their future activities, while others perceive the finance industry as one of excess and advocate a checking system. However, says Colliard, evidence shows that there is no black or white: While the presence of market failures (i.e. if you let market players roam freely, you will not achieve the best possible outcome) is no longer challenged, there are also regulatory failures. "I therefore try to give students the tools to understand what it means to question whether regulation is ‘good’ or ‘bad’ and how that can be assessed,” he explains. 

To keep the subject up-to-date, the academic relies heavily on the latest research papers published globally, including his own and that of several HEC colleagues also active in the field. HEC Paris works closely with France’s regulatory authorities (Banque de France, ACPR, AMF), and this enables researchers like Colliard to access privileged data and speak with practitioners on a regular basis. This he uses to tackle topics in the classroom like how many inspections are conducted by supervisors, whether regulation is driven by lobbying (or not), who is actually winning or losing from regulation, how firms adapt to regulations, or how they see their financing costs change because of them. “Our knowledge comes from very recent research papers and this is super important when teaching the topic” says the academic, whose own research is directly mobilized as evidenced in three examples below.

Regulation is highly intricate and part of Colliard’s research focuses on whether or not regulation is too complicated, assessing the pros and cons of this complexity. Some of his students embrace this complexity, believing reading the three Basel agreements, the latest of which comprises over 600 pages, will make them more knowledgeable. But Colliard disagrees: "To me that’s pointless, especially as in a couple of years Basel 4 will come along with a different text.” Rather than teaching all the different rules, he therefore focuses more on the economic logic behind it. By exploring the reasons behind certain rules and their objectives, he provides HEC students with an understanding of the global regulatory architecture. This equates to long-term knowledge: “The problems regulations are trying to solve are not going to disappear overnight and will always be there in one form or another,” explains Colliard. 

Banking supervision is another important research topic the academic brings directly to the classroom. A big problem, he says, is for instance the race to the bottom between national regulators to attract more business. “Unfortunately if everybody does that, then no bank is properly regulated and it’s important developed countries agree on a set of rules they all apply,” he explains. Then, once regulations are in place, the supervisors’ role is to ensure these rules are followed. However, supervisors also have incentives to be “too lenient with the banks”, says Colliard, as they face pressure to favor domestic banks, thereby placing them in a better position to compete with foreign counterparts –this in turn calls for new mechanisms to supervise the supervisors.

Another of Colliard’s areas of interest is the regulation of systemic risk, which he describes as a very important topic for large banks and regulators alike. In the research paper he co-wrote on systemic risk, he and his co-authors point out the discrepancy between current regulation and current state of knowledge. Namely, while research has long pointed out that smaller banks can be systemic due to their interconnectedness or other characteristics, regulation still focuses largely on size alone. "If you take a bank that’s not very big, its place in the network and how it lends to banks could well affect how bad it can be for the overall system if it fails."


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HEC Paris Masters in Finance Ranked number 1 worlwide by the Financial Times

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Jean-Edouard Colliard
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