Essays on Banking Crises

This thesis aims at finding the role of deposit insurance scheme and central bank (CB) in keeping the banking system safe. The thesis also studies the factors associated with long-lasting banking crises. The first essay analyzes the effect of using explicit deposit insurance scheme (EDIS), instead of using implicit deposit insurance scheme (IDIS), on banking crises. The panel data for the period of 1980-2003 includes all countries for which the data on EDIS or IDIS exist. 70% of the countries in the sample are less developed countries (LDCs). About 55% of the countries adopting EDIS also come from LDCs. The major finding is that the using of EDIS increases the crisis probability at a strong significance level. This probability is greater if the EDIS is inefficiently designed allowing higher scope of moral hazard problem. Specifically, the probability is greater if the EDIS provides higher coverage to deposits and if it is less powerful from the legal point of view. This study also finds that the less developed a country is to handle EDIS, the higher the chance of banking crisis. Once the underdevelopment of an economy handling the EDIS is controlled, the EDIS separately is no longer a significant factor of banking crises. The second essay aims at determining whether a country s powerful CB can lessen the instability of the banking sector by minimizing the likelihood of a banking crisis. The data used include indicators of the CB s autonomy for a set of countries over the period of 1980-89. The study finds that in aggregate a more powerful CB lessens the probability of banking crisis. When the CB s authority is disentangled with respect to its responsibilities, the study finds that the longer tenure of CB s chief executive officer and the greater power of CB in assigning interest rate on government loans are necessary for reducing the probability of banking crisis. The study also finds that the probability of crisis reduces more if an autonomous CB can perform its duties in a country with stronger law and order tradition. The costs of long-lasting banking crises are high because both the depositors and the investors lose confidence in the banking system. For a rapid recovery of a crisis, the government very often undertakes one or more crisis resolution policy (CRP) measures. The third essay examines the CRP and other explanatory variables correlated with the durations of banking crises. The major finding is that the CRP measure allowing the regulation forbearance to keep the insolvent banks operative and the public debt relief program are respectively strongly and weakly significant to increase the durations of crises. Some other explanatory variables, which were found by previous studies to be related with the probability of crises to occur, are also correlated with the durations of crises.

Matti Laurila : Jääkäriupseeri, suojeluskuntapäällikkö, rintamakomentaja

Matti Laurila (1895 1983) This is a biographical research of a Jaeger officer, a Civil Guard Chief, a Field Commander Matti Laurila. A broader practice of qualitative methods was utilized in the research. The main aim is a permanent reconstruction and reinterpretation of past events through the experiences of the study object. The life and times of Laurila are intertwined with the crucial events that led to the Finnish Declaration of Independence. Afterwards he helped to ensure that the young republic also stayed independent. As a Jaeger in the winter of 1917 Laurila witnessed an incident he would never forget. After disobeying a direct order, Sven Saarikoski from Lapua was shot dead by his commanding officer, K. A. Ståhlberg, on the ice of the river Aa. Laurila faced the horrors of war at closer quarters, for he lost his father and his brother in the battle of Länkipohja on 16th March 1918. This battle was a major turning point for Laurila and profoundly influenced the rest of his life. The relationship between Laurila and his superiors was problematic almost throughout his military career, haunted as he was by the memory of Sven Saarikoski's execution and the losses in Länkipohja The position of Laurila as an authority in South Ostrobothnia was a key factor in preventing the extreme right from rallying enough Civil Guard troops to escalate the embryonic Mäntsälä rebellion of 1932. After the rebellion Laurila routinely opposed anything he saw as a threat to the independence of the Civil Guard. He would flatly refuse to even consider the integration of the Civil Guard into the national defence force. His uncompromising stand in this matter annoyed some among the higher ranking officers. After the Winter War Laurila got himself into a dispute with Jaeger Colonel H. E. Hannuksela that would have long-lasting consequences. The conflicts between them became widely known in the attack phase of the Continuation War in 1941 at the latest. Laurila had to give up his military career at the end of 1944. In the years that followed he did what he could to ensure that the South Ostrobothnia Civil Guard patrimony remained in the province. Laurila's position as a respected authority in South Ostrobothnia remained unchanged until his death.

Factors Driving Stock Option Grants - Empirical Evidence from Finland

This study contributes to the executive stock option literature by looking at factors driving the introduction of such a compensation form on a firm level. Using a discrete decision model I test the explanatory power of several agency theory based variables and find strong support for predictability of the form of executive compensation. Ownership concentration and liquidity are found to have a significant negative effect on the probability of stock option adoption. Furtermore, I find evidence of CEO ownership, institutional ownership, investment intensity, and historical market return having a significant and a positive relationship to the likelihood of adopting a executive stock option program.

Executive Stock Options: Exercise Policy and Market Reaction

In this paper I investigate the exercise policy, and the market reaction to that, of the executive stock option holders in Finland. The empirical tests are conducted with aggregated firm level data from 34 firms and 41 stock option programs. I find some evidence of an inverse relation between the exercise intensity of the options holders and the future abnormal return of the company share price. This finding is supported by the view that information about future company prospect seems to be the only theoretical attribute that could delay the exercise of the options. Moreover, a high concentration of exercises in the beginning of the exercise window is predicted and the market is expected to react to deviations from this. The empirical findings however show that the market does not react homogenously to the information revealed by the late exercises.

Share Repurchases, Dividends, and Executive Options

This paper reports empirical results on the determinants of the authorization decision for share repurchases and dividends in Finland. We use a data set with precise data on share repurchases as well as characteristics for the option programs. Contrary to the U.S., we use a data set where 41% of the options are dividend protected, which allows us to separate between the "option funding" and "substitution / managerial wealth" hypothesis for the choice of the distribution method. We find that foreign ownership is the main determinant for share repurchases in Finland and attribute this relationship to tax factors. We also find evidence in support of both the signaling and agency cost hypotheses for cash distributions, especially in the case of share repurchases. Finally, we find a significant difference between companies with and without dividend protected options. When options are dividend protected, the relationship between dividend distributions and the scope of the options program turns to a significantly positive one instead of the negative one documented on U.S. data. This gives some support for the substitution / managerial wealth hypothesis as a determinant for the choice of the distribution method.