This course studies how the financial system works to support economic growth most of the times and how it gets into a crisis occasionally and puts the economy into a recession. We examine recent papers in economics that tackle these questions theoretically and empirically. The course emphasizes the importance of the informational and incentive problems inherent in financial transactions. The financial system consists of various mechanisms to mitigate those problems but the mechanisms are not perfect and sometimes fail. We also study various aspects of financial stress testing, which has become very popular after the global financial crisis in 2007-2009. Stress tests are used to assess the resilience of individual financial institutions as well as the financial system as a whole to various shocks.