About financial engineering & banking

During the last decades the globalization of financial markets, the intensifying competition as well as the rapid economic, social and technological changes, have led to an increasing uncertainty and instability in the financial and business environments. This new context has given a new rise to the role of financial management for the operation of firms and organizations. Furthermore, along with the increasing significance of financial management, the complexity of financial decisions has also increased with the introduction of new financial products and services.

Within this new context the nature of the financial theory has changed. At the beginning of the 20th century, finance was mainly a descriptive science focusing on institutional and legal aspects. The transformation of finance began during the 1950s with the introduction of Markowitz’s portfolio theory and intensified after then 1970s with the work of Black and Scholes on option pricing. These pioneering works have demonstrated that the descriptive character of financial theory was gradually progressing towards a more analytic one, which ultimately led to the engineering phase of finance by the late 1980s.

The term financial engineering is now widely used to refer to the new era of finance. Financial engineering refers to the design, development and implementation of innovative financial instruments and processes and the formulation of innovative solutions to financial decision making problems. 

Financial engineering is a broad field involved in almost all areas of modern finance, ranging from portfolio management and derivatives, to fund management, value at risk analysis, and credit risk management. It uses a wide range of methodological tools (management science/operations research, probability theory and stochastic calculus, statistics, econometrics, etc.) to analyze financial decision-making problems and to facilitate the construction of innovative solutions and financial products that meet the decision-makers’ goals.

Financial engineering is of particular interest for banking institutions. Financial innovation in the form of new financing and investment products as well as the design of efficient risk management procedures are both crucial for the viability of banking institutions in a highly competitive global market. Thus, it is of no suprise that nowadays banks use excessively financial engineering for risk assessment, asset-liability management, financial planning, portfolio optimization, etc. Furthermore, banking management is also involved with a number of other issues such as the regulatory framework, auditing and control, productivity and efficiency analysis, mergers & acquisitions, customer relationship management, etc. Thus, a unified approach is required in order to ensure a viable and stable growth of the global banking sector, combining financial engineering techniques with basic principles and strategies of banking management. 

Partner institutions ESCP Europe Business School Technical Univerity of Crete ARISTOTLE UNIVERSITY OF THESSALONIKI Audencia Business School
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