Screening Cycles

We demonstrate how endogenous information acquisition in credit markets creates lending cycles when competing banks undertake their screening decisions in an uncoordinated way, thereby highlighting the role of intertemporal screening externalities induced by lending market competition as a structural source of instability. We show that uncoordinated screening behavior of competing banks may be not only the source of an important financial multiplier, but also an independent source of fluctuations inducing business cycles. The screening cycle mechanism is robust to generalizations along many dimensions such as the lending market structure, the lending rate determination and the imperfections in the screening technology.

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.

The mast cell as a regulator of atherosclerotic plaque stability

Atherosclerosis is an inflammatory disease progressing over years via the accumulation of cholesterol in arterial intima with subsequent formation of atherosclerotic plaques. The stability of a plaque is determined by the size of its cholesterol-rich necrotic lipid core and the thickness of the fibrous cap covering it. The strength and thickness of the cap are maintained by smooth muscle cells and the extracellular matrix produced by them. A plaque with a large lipid core and a thin cap is vulnerable to rupture that may lead to acute atherothrombotic events, such as myocardial infarction and stroke. In addition, endothelial erosion, possibly induced by apoptosis of endothelial cells, may lead to such clinical events. One of the major causes of plaque destabilization is inflammation induced by accumulated and modified lipoproteins, and exacerbated by local aberrant shear stress conditions. Macrophages, T-lymphocytes and mast cells infiltrate particularly into the plaque’s shoulder regions prone to atherothrombotic events, and they are present at the actual sites of plaque rupture and erosion. Two major mechanisms of plaque destabilization induced by inflammation are extracellular matrix remodeling and apoptosis. Mast cells are bone marrow-derived inflammatory cells that as progenitors upon chemotactic stimuli infiltrate the target tissues, such as the arterial wall, differentiate in the target tissues and mediate their effects via the release of various mediators, typically in a process called degranulation. The released preformed mast cell granules contain proteases such as tryptase, chymase and cathepsin G bound to heparin and chondroitin sulfate proteoglycans. In addition, various soluble mediators such as histamine and TNF-alpha are released. Mast cells also synthesize many mediators such as cytokines and lipid mediators upon activation. Mast cells are capable of increasing the level of LDL cholesterol in the arterial intima by increasing accumulation and retention of LDL and by decreasing removal of cholesterol by HDL in vitro. In addition, by secreting proinflammatory mediators and proteases, mast cells may induce plaque destabilization by inducing apoptosis of smooth muscle and endothelial cells. Also in vivo data from apoE-/- and ldlr-/- mice suggest a role for mast cells in the progression of atherosclerosis. Furthermore, mast cell-deficient mice have become powerful tools to study the effects of mast cells in vivo. In this study, evidence suggesting a role for mast cells in the regulation of plaque stability is presented. In a mouse model genetically susceptible to atherosclerosis, mast cell deficiency (ldlr-/-/KitW-sh/W-sh mice) was associated with a less atherogenic lipid profile, a decreased level of lipid accumulation in the aortic arterial wall and a decreased level of vascular inflammation as compared to mast-cell competent littermates. In vitro, mast cell chymase-induced smooth muscle cell apoptosis was mediated by inhibition of NF-kappaB activity, followed by downregulation of bcl-2, release of cytochrome c, and activation of caspase-8, -9 and -3. Mast cell-induced endothelial cell apoptosis was mediated by chymase and TNF-alpha, and involved chymase-mediated degradation of fibronectin and vitronectin, and inactivation of FAK- and Akt-mediated survival signaling. Subsequently, mast cells induced inhibition of NF-kappaB activity and activation of caspase-8 and -9. In addition, possible mast cell protease-mediated mechanisms of endothelial erosion may include degradation of fibronectin and VE-cadherin. Thus, the present results suggest a role for mast cells in destabilization of atherosclerotic plaques.

Essays on the Linkages Between Financial Markets, and Risk Asymmetries (summary section only)

During the last few decades there have been far going financial market deregulation, technical development, advances in information technology, and standardization of legislation between countries. As a result, one can expect that financial markets have grown more interlinked. The proper understanding of the cross-market linkages has implications for investment and risk management, diversification, asset pricing, and regulation. The purpose of this research is to assess the degree of price, return, and volatility linkages between both geographic markets and asset categories within one country, Finland. Another purpose is to analyze risk asymmetries, i.e., the tendency of equity risk to be higher after negative events than after positive events of equal magnitude. The analysis is conducted both with respect to total risk (volatility), and systematic risk (beta). The thesis consists of an introductory part and four essays. The first essay studies to which extent international stock prices comove. The degree of comovements is low, indicating benefits from international diversification. The second essay examines the degree to which the Finnish market is linked to the “world market”. The total risk is divided into two parts, one relating to world factors, and one relating to domestic factors. The impact of world factors has increased over time. After 1993, when foreign investors were allowed to freely invest in Finnish assets, the risk level has been higher than previously. This was also the case during the economic recession in the beginning of the 1990’s. The third essay focuses on the stock, bond, and money markets in Finland. According to a trading model, the degree of volatility linkages should be strong. However, the results contradict this. The linkages are surprisingly weak, even negative. The stock market is the most independent, while the money market is affected by events on the two other markets. The fourth essay concentrates on volatility and beta asymmetries. Contrary to many international studies there are only few cases of risk asymmetries. When they occur, they tend to be driven by the market-wide component rather than the portfolio specific element.

Profitable Customer Management: A Study in Retail Banking

The increasing focus of relationship marketing and customer relationship management (CRM) studies on issues of customer profitability has led to the emergence of an area of research on profitable customer management. Nevertheless, there is a notable lack of empirical research examining the current practices of firms specifically with regard to the profitable management of customer relationships according to the approaches suggested in theory. This thesis fills this research gap by exploring profitable customer management in the retail banking sector. Several topics are covered, including marketing metrics and accountability; challenges in the implementation of profitable customer management approaches in practice; analytic versus heuristic (‘rule of thumb’) decision making; and the modification of costly customer behavior in order to increase customer profitability, customer lifetime value (CLV), and customer equity, i.e. the financial value of the customer base. The thesis critically reviews the concept of customer equity and proposes a Customer Equity Scorecard, providing a starting point for a constructive dialog between marketing and finance concerning the development of appropriate metrics to measure marketing outcomes. Since customer management and measurement issues go hand in hand, profitable customer management is contingent on both marketing management skills and financial measurement skills. A clear gap between marketing theory and practice regarding profitable customer management is also identified. The findings show that key customer management aspects that have been proposed within the literature on profitable customer management for many years, are not being actively applied by the banks included in the research. Instead, several areas of customer management decision making are found to be influenced by heuristics. This dilemma for marketing accountability is addressed by emphasizing that CLV and customer equity, which are aggregate metrics, only provide certain indications regarding the relative value of customers and the approximate value of the customer base (or groups of customers), respectively. The value created by marketing manifests itself in the effect of marketing actions on customer perceptions, behavior, and ultimately the components of CLV, namely revenues, costs, risk, and retention, as well as additional components of customer equity, such as customer acquisition. The thesis also points out that although costs are a crucial component of CLV, they have largely been neglected in prior CRM research. Cost-cutting has often been viewed negatively in customer-focused marketing literature on service quality and customer profitability, but the case studies in this thesis demonstrate that reduced costs do not necessarily have to lead to lower service quality, customer retention, and customer-related revenues. Consequently, this thesis provides an expanded foundation upon which marketers can stake their claim for accountability. By focusing on the range of drivers and all of the components of CLV and customer equity, marketing has the potential to provide specific evidence concerning how various activities have affected the drivers and components of CLV within different groups of customers, and the implications for customer equity on a customer base level.

Credit Default Swaps and Insurance: Against the Potts Opinion

Little attention has been given to the possibility that CDS transactions might be construed as insurance contracts in English law. This article challenges the widespread “Potts opinion”, which states that CDSs are not insurance, because they do not require the protection buyer to sustain a loss or to have an insurable interest in the subject matter. CDSs often do provide protection against loss that the buyer is exposed to; loss indemnity is not a necessary characterisation of an insurance contract; insurable interest does not form part of the definition of insurance, but is an additional requirement of valid insurance; and what matters is the substance not the form of the contract. The situation in the US and Australia is also briefly considered.

The Transcriptional Regulation of Retrotransposon BARE

The purpose of this research project was to understand the steps of the retrotransposon BARE (BArley REtrotransposon) life cycle, from regulation of transcription to Virus-Like Particle (VLP) formation and ultimate integration back into the genome. Our study concentrates mainly on BARE1 transcriptional regulation because transcription is the crucial first step in the retrotransposon life cycle. The BARE element is a Class I LTR (Long Terminal Repeat) retrotransposon belonging to the Copia superfamily and was originally isolated in our research group. The LTR retrotransposons are transcribed from promoters in the LTRs and encode proteins for packaging of their transcripts, the reverse transcription of the transcripts into cDNA, and integration of the cDNA back into the genome. BARE1 is translated as a single polyprotein and cleaved into the capsid protein (GAG), integrase (IN), and reverse transcriptase-RNaseH (RT-RH) by the integral aspartic proteinase (AP). The BARE retrotransposon family comprises more than 104 copies in the barley (Hordeum vulgare) genome. The element is bound by long terminal repeats (LTRs, 1829 bp) containing promoters required for replication, signals for RNA processing, and motifs necessary for the integration of the cDNA. Members of the BARE1 subfamily are transcribed, translated, and form virus-like particles. Several basic questions concerning transcription are explored in the thesis: BARE1 transcription control, promoter choice in different barley tissues, start and termination sites for BARE transcripts, and BARE1 transcript polyadenylation (I). Polyadenylation is an important step during mRNA maturation, and determines its stability and translatability among other characteristics. Our work has found a novel way used by BARE1 to make extra GAG protein, which is critical for VLP formation. The discovery that BARE1 uses one RNA population for protein synthesis and another RNA population for making cDNA has established the most important step of the BARE1 life cycle (III). The relationship between BARE1 and BARE2 has been investigated. Besides BARE, we have examined the retrotransposon Cassandra (II), which uses a very different transcriptional mechanism and a fully parasitic life cycle. In general, this work is focused on BARE1 promoter activity, transcriptional regulation including differential promoter usage and RNA pools, extra GAG protein production and VLP formation. The results of this study give new insights into transcription regulation of LTR retrotransposons.

Functional regulation of the Neurofibromatosis 2 tumor suppressor merlin

Neurofibromatosis 2 (NF2) is an autosomal dominant disorder manifested by the formation of multiple benign tumors of the nervous system. Affected individuals typically develop bilateral vestibular schwannomas which lead to deafness and balance disorders. The syndrome is caused by inactivation of the NF2 tumor suppressor gene, and mutation or loss of the NF2 product, merlin, is sufficient for tumorigenesis in both hereditary and sporadic NF2-associated tumors. Merlin belongs to the band 4.1 superfamily of cytoskeletal proteins, which also contain the related ezrin, radixin, and moesin (ERM) proteins. The ERM members provide a link between the cell cytoskeleton and membrane by connecting membrane-associated proteins to actin filaments. By stabilizing complexes in the cell cortex, the ERMs modulate morphology, growth, and migration of cells. Despite their structural homology, overlapping subcellular distribution, direct molecular association, and partial overlap of molecular interactions, merlin and ezrin exert opposite effects on cell proliferation. Merlin suppresses cell proliferation, whereas ezrin expression is linked to oncogenic activity. We hypothesized that the regions which differ between the proteins might explain merlin s specificity as a tumor suppressor. We therefore analyzed the regions, which are most diverse between merlin and ezrin; the N-terminal tail and the C-terminus. To determine the properties of the C-terminal region, we studied the two most predominant merlin isoforms together with truncation variants similar to those found in patients. We also focused on the evolutionally conserved C-terminal residues, E545-E547, that harbor disease causing mutations in its corresponding DNA sequence. In addition to inhibiting cell proliferation, merlin regulates cytoskeletal organization. The morphogenic properties of merlin may play a role in tumor suppression, since patient-derived tumor cells demonstrate cytoskeletal abnormalities. We analyzed the mechanisms of merlin-induced extension formation and determined that the C-terminal region of amino acids 538-568 is particularly important for the morphogenic activity. We also characterized the role of C-terminal merlin residues in the regulation of proliferation, phosphorylation, and intramolecular associations. In contrast to previous reports, we demonstrated that both merlin isoforms are able to suppress cell proliferation, whereas C-terminally mutated merlin constructs showed reduced growth inhibition. Phosphorylation serves as a mechanism to regulate the tumor suppressive activity of merlin. The C-terminal serine 518 is phosphorylated in response to both p21-activated kinase (PAK) and protein kinase A (PKA), which inactivates the growth inhibitory function of merlin. However, at least three differentially phosphorylated forms of the protein exist. In this study we demonstrated that also the N-terminus of merlin is phosphorylated by AGC kinases, and that both PKA and Akt phosphorylate merlin at serine 10 (S10). We evaluated the impact of this N-terminal tail phosphorylation, and showed that the phosphorylation state of S10 is an important regulator of merlin s ability to modulate cytoskeletal organization but also regulates the stability of the protein. In summary, this study describes the functional effect of merlin specific regions. We demonstrate that both S10 in the N-terminal tail and residues E545-E547 in the C-terminus are essential for merlin activity and function.