Banking Regulation in Turkey and Russia: An Economic Analysis

The importance of the banks and financial markets relies on the fact that they promote economic efficiency by allocating savings efficiently to profitable investment opportunities.An efficient banking system is a key determinant for the financial stability.The theory of market failure forms the basis for understanding financial regulation.Following the detrimental economic and financial consequences in theaftermath of the crisis, academics and policymakers started to focus their attention on the construction of an appropriate regulatory and supervisory framework of the banking sector. This dissertation aims at understanding the impact of regulations and supervision on banks’ performance focusing on two emerging market economies, Turkey and Russia. It aims at examining the way in which regulations matter for financial stability and banking performance from a law & economics perspective. A review of the theory of banking regulation, particularly as applied to emerging economies, shows that the efficiency of certain solutions regarding banking regulation is open to debate. Therefore, in the context of emerging countries, whether a certain approach is efficient or not will be presented as an empirical question to which this dissertation will try to find an answer.

The Law and Economics of Hedge Fund Regulation: A Comparison between the U.S. and the EU

This doctoral dissertation seeks to assess and address the potential contribution of the hedge fund industry to financial instability. In so doing, the dissertation investigates three main questions. What are the contributions of hedge funds to financial instability? What is the optimal regulatory strategy to address the potential contribution of hedge funds to financial instability? And do new regulations in the U.S. and the EU address the contribution of hedge funds to financial instability? With respect to financial stability concerns, it is argued that despite their benefits, hedge funds can contribute to financial instability. Hedge funds’ size and leverage, their interconnectedness with Large Complex Financial Institutions (LCFIs), and the likelihood of herding behavior in the industry can potentially undermine financial stability. Nonetheless, the data on hedge funds’ size and leverage suggest that these features are far from being systemically important. In contrast, the empirical evidence on the interconnectedness of hedge funds with LCFIs and their herding behavior is mixed. Based on these findings, the thesis focuses on one particular aspect of hedge fund regulation: direct vs. indirect regulation. In this respect, a major contribution of the thesis to the literature consists in the explicit discussion of the relationships between hedge funds and other market participants. Specifically, the thesis locates the domain of the indirect regulation in the inter-linkages between hedge funds and prime brokers. Accordingly, the thesis argues that the indirect regulation is likely to address the contribution of hedge funds to systemic risk without compromising their benefits to financial markets. The thesis further conducts a comparative study of the regulatory responses to the potential contribution of hedge funds to financial instability through studying the EU Directive on Alternative Investment Fund Managers (AIFMD) and the hedge fund-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Mortgage securitization and its credit risk control

This dissertation concentrate on the mortgage securitization and its credit risk, which are criticized as the main causes of the financial crisis. From the point of the veiw of mortgage's evolution, the nature, structure and function of mortgage has been radically changed, yet the mortgage law did not give appropriate response to this market change. Meanwhile, the U.S legilslations facilitating the mortgage securitization also have rotten the legal foundations for mortgage market self-regulation and sustained development. In contrast, the EU covered bond system has kept financial stability for 200 years' time, and their statutory approach has been proved to be able to control the credit risk and incentive problems very well, in combination of market self-regulation and public regulation. So the future reform should be directed to strengthen the market's capacity of self-regulation and improve the public regulation. For the development of mortgage securitization in China, it is suggested to introduce the EU covered bond system for the reason of the equilibrium between funding efficiency and financial stability.

Essays in Macroeconomics

The dissertation consists of four papers that aim at providing new contributions in the field of macroeconomics, monetary policy and financial stability. The first paper proposes a new Dynamic Stochastic General Equilibrium (DSGE) model with credit frictions and a banking sector to study the pro-cyclicality of credit and the role of different prudential regulatory frameworks in affecting business cycle fluctuations and in restoring macroeconomic and financial stability. The second paper develops a simple DSGE model capable of evaluating the effects of large purchases of treasuries by central banks. This theoretical framework is employed to evaluate the impact on yields and the macroeconomy of large purchases of medium- and long-term government bonds recently implemented in the US and UK. The third paper studies the effects of ECB communications about unconventional monetary policy operations on the perceived sovereign risk of Italy over the last five years. The empirical results are derived from both an event-study analysis and a GARCH model, which uses Italian long-term bond futures to disentangle expected from unexpected policy actions. The fourth paper proposes a DSGE model with an endogenous term structure of interest rates, which is able to replicate the stylized facts regarding the yield curve and the term premium in the US over the period 1987:3-2011:3, without compromising its ability to match macro dynamics.

Determining the effect of regulation on Microfinance Institutions Financial Self-Sustainability. A Cross-Country Comparison

Microfinance is an initiative which seeks to address financial inclusion, micro-entrepreneurship, and poverty reduction without over burdening governments. However, the current sector of microfinance is still heavily dependent on the good will of donors. The over-reliance on donations is a feature which threatens the long term sustainability of microfinance. Much has been written about this reliance, but research to date hasn’t empirically examined the effect of regulation as a mediator. This is a critical area of study because regulation directly affects Microfinance Institutions’ (MFI) innovation, and innovation is what shapes the future of microfinance. This thesis considers the role that regulation plays in affecting MFI’s and their ability to innovate in products, services and long-term sustainability via access to capital. Interviews were undertaken with stakeholders in MFI’s, NGO’s, Self-Regulating Bodies, and Regulators in India, Pakistan, and Bangladesh. This thesis discusses findings from interviews in relation to regulatory measures regarding financial self-sustainability of MFI’s. The conclusions of this thesis have implications for policy and inform the microfinance literature.

Securitization and Special Purpose Vehicles in an International Setting: a Systemic View

The present work tries to display a comprehensive and comparative study of the different legal and regulatory problems involved in international securitization transactions. First, an introduction to securitization is provided, with the basic elements of the transaction, followed by the different varieties of it, including dynamic securitization and synthetic securitization structures. Together with this introduction to the intricacies of the structure, a insight into the influence of securitization in the financial and economic crisis of 2007-2009 is provided too; as well as an overview of the process of regulatory competition and cooperation that constitutes the framework for the international aspects of securitization. The next Chapter focuses on the aspects that constitute the foundations of structured finance: the inception of the vehicle, and the transfer of risks associated to the securitized assets, with particular emphasis on the validity of those elements, and how a securitization transaction could be threatened at its root. In this sense, special importance is given to the validity of the trust as an instrument of finance, to the assignment of future receivables or receivables in block, and to the importance of formalities for the validity of corporations, trusts, assignments, etc., and the interaction of such formalities contained in general corporate, trust and assignment law with those contemplated under specific securitization regulations. Then, the next Chapter (III) focuses on creditor protection aspects. As such, we provide some insights on the debate on the capital structure of the firm, and its inadequacy to assess the financial soundness problems inherent to securitization. Then, we proceed to analyze the importance of rules on creditor protection in the context of securitization. The corollary is in the rules in case of insolvency. In this sense, we divide the cases where a party involved in the transaction goes bankrupt, from those where the transaction itself collapses. Finally, we focus on the scenario where a substance over form analysis may compromise some of the elements of the structure (notably the limited liability of the sponsor, and/or the transfer of assets) by means of veil piercing, substantive consolidation, or recharacterization theories. Once these elements have been covered, the next Chapters focus on the regulatory aspects involved in the transaction. Chapter IV is more referred to “market” regulations, i.e. those concerned with information disclosure and other rules (appointment of the indenture trustee, and elaboration of a rating by a rating agency) concerning the offering of asset-backed securities to the public. Chapter V, on the other hand, focuses on “prudential” regulation of the entity entrusted with securitizing assets (the so-called Special Purpose vehicle), and other entities involved in the process. Regarding the SPV, a reference is made to licensing requirements, restriction of activities and governance structures to prevent abuses. Regarding the sponsor of the transaction, a focus is made on provisions on sound originating practices, and the servicing function. Finally, we study accounting and banking regulations, including the Basel I and Basel II Frameworks, which determine the consolidation of the SPV, and the de-recognition of the securitized asset from the originating company’s balance-sheet, as well as the posterior treatment of those assets, in particular by banks. Chapters VI-IX are concerned with liability matters. Chapter VI is an introduction to the different sources of liability. Chapter VII focuses on the liability by the SPV and its management for the information supplied to investors, the management of the asset pool, and the breach of loyalty (or fiduciary) duties. Chapter VIII rather refers to the liability of the originator as a result of such information and statements, but also as a result of inadequate and reckless originating or servicing practices. Chapter IX finally focuses on third parties entrusted with the soundness of the transaction towards the market, the so-called gatekeepers. In this respect, we make special emphasis on the liability of indenture trustees, underwriters and rating agencies. Chapters X and XI focus on the international aspects of securitization. Chapter X contains a conflicts of laws analysis of the different aspects of structured finance. In this respect, a study is made of the laws applicable to the vehicle, to the transfer of risks (either by assignment or by means of derivatives contracts), to liability issues; and a study is also made of the competent jurisdiction (and applicable law) in bankruptcy cases; as well as in cases where a substance-over-form is performed. Then, special attention is also devoted to the role of financial and securities regulations; as well as to their territorial limits, and extraterritoriality problems involved. Chapter XI supplements the prior Chapter, for it analyzes the limits to the States’ exercise of regulatory power by the personal and “market” freedoms included in the US Constitution or the EU Treaties. A reference is also made to the (still insufficient) rules from the WTO Framework, and their significance to the States’ recognition and regulation of securitization transactions.

Studies of OPA1 pathogenic mechanisms in Dominant Optic Atrophy and novel protein function in mitochondrial DNA stability

The mitochondrion is an essential cytoplasmic organelle that provides most of the energy necessary for eukaryotic cell physiology. Mitochondrial structure and functions are maintained by proteins of both mitochondrial and nuclear origin. These organelles are organized in an extended network that dynamically fuses and divides. Mitochondrial morphology results from the equilibrium between fusion and fission processes, controlled by a family of “mitochondria-shaping” proteins. It is becoming clear that defects in mitochondrial dynamics can impair mitochondrial respiration, morphology and motility, leading to apoptotic cell death in vitro and more or less severe neurodegenerative disorders in vivo in humans. Mutations in OPA1, a nuclear encoded mitochondrial protein, cause autosomal Dominant Optic Atrophy (DOA), a heterogeneous blinding disease characterized by retinal ganglion cell degeneration leading to optic neuropathy (Delettre et al., 2000; Alexander et al., 2000). OPA1 is a mitochondrial dynamin-related guanosine triphosphatase (GTPase) protein involved in mitochondrial network dynamics, cytochrome c storage and apoptosis. This protein is anchored or associated on the inner mitochondrial membrane facing the intermembrane space. Eight OPA1 isoforms resulting from alternative splicing combinations of exon 4, 4b and 5b have been described (Delettre et al., 2001). These variants greatly vary among diverse organs and the presence of specific isoforms has been associated with various mitochondrial functions. The different spliced exons encode domains included in the amino-terminal region and contribute to determine OPA1 functions (Olichon et al., 2006). It has been shown that exon 4, that is conserved throughout evolution, confers functions to OPA1 involved in maintenance of the mitochondrial membrane potential and in the fusion of the network. Conversely, exon 4b and exon 5b, which are vertebrate specific, are involved in regulation of cytochrome c release from mitochondria, and activation of apoptosis, a process restricted to vertebrates (Olichon et al., 2007). While Mgm1p has been identified thanks to its role in mtDNA maintenance, it is only recently that OPA1 has been linked to mtDNA stability. Missense mutations in OPA1 cause accumulation of multiple deletions in skeletal muscle. The syndrome associated to these mutations (DOA-1 plus) is complex, consisting of a combination of dominant optic atrophy, progressive external ophtalmoplegia, peripheral neuropathy, ataxia and deafness (Amati- Bonneau et al., 2008; Hudson et al., 2008). OPA1 is the fifth gene associated with mtDNA “breakage syndrome” together with ANT1, PolG1-2 and TYMP (Spinazzola et al., 2009). In this thesis we show for the first time that specific OPA1 isoforms associated to exon 4b are important for mtDNA stability, by anchoring the nucleoids to the inner mitochondrial membrane. Our results clearly demonstrate that OPA1 isoforms including exon 4b are intimately associated to the maintenance of the mitochondrial genome, as their silencing leads to mtDNA depletion. The mechanism leading to mtDNA loss is associated with replication inhibition in cells where exon 4b containing isoforms were down-regulated. Furthermore silencing of exon 4b associated isoforms is responsible for alteration in mtDNA-nucleoids distribution in the mitochondrial network. In this study it was evidenced that OPA1 exon 4b isoform is cleaved to provide a 10kd peptide embedded in the inner membrane by a second transmembrane domain, that seems to be crucial for mitochondrial genome maintenance and does correspond to the second transmembrane domain of the yeasts orthologue encoded by MGM1 or Msp1, which is also mandatory for this process (Diot et al., 2009; Herlan et al., 2003). Furthermore in this thesis we show that the NT-OPA1-exon 4b peptide co-immuno-precipitates with mtDNA and specifically interacts with two major components of the mitochondrial nucleoids: the polymerase gamma and Tfam. Thus, from these experiments the conclusion is that NT-OPA1- exon 4b peptide contributes to the nucleoid anchoring in the inner mitochondrial membrane, a process that is required for the initiation of mtDNA replication and for the distribution of nucleoids along the network. These data provide new crucial insights in understanding the mechanism involved in maintenance of mtDNA integrity, because they clearly demonstrate that, besides genes implicated in mtDNA replications (i.e. polymerase gamma, Tfam, twinkle and genes involved in the nucleotide pool metabolism), OPA1 and mitochondrial membrane dynamics play also an important role. Noticeably, the effect on mtDNA is different depending on the specific OPA1 isoforms down-regulated, suggesting the involvement of two different combined mechanisms. Over two hundred OPA1 mutations, spread throughout the coding region of the gene, have been described to date, including substitutions, deletions or insertions. Some mutations are predicted to generate a truncated protein inducing haploinsufficiency, whereas the missense nucleotide substitutions result in aminoacidic changes which affect conserved positions of the OPA1 protein. So far, the functional consequences of OPA1 mutations in cells from DOA patients are poorly understood. Phosphorus MR spectroscopy in patients with the c.2708delTTAG deletion revealed a defect in oxidative phosphorylation in muscles (Lodi et al., 2004). An energetic impairment has been also show in fibroblasts with the severe OPA1 R445H mutation (Amati-Bonneau et al., 2005). It has been previously reported by our group that OPA1 mutations leading to haploinsufficiency are associated in fibroblasts to an oxidative phosphorylation dysfunction, mainly involving the respiratory complex I (Zanna et al., 2008). In this study we have evaluated the energetic efficiency of a panel of skin fibroblasts derived from DOA patients, five fibroblast cell lines with OPA1 mutations causing haploinsufficiency (DOA-H) and two cell lines bearing mis-sense aminoacidic substitutions (DOA-AA), and compared with control fibroblasts. Although both types of DOA fibroblasts maintained a similar ATP content when incubated in a glucose-free medium, i.e. when forced to utilize the oxidative phosphorylation only to produce ATP, the mitochondrial ATP synthesis through complex I, measured in digitonin-permeabilized cells, was significantly reduced in cells with OPA1 haploinsufficiency only, whereas it was similar to controls in cells with the missense substitutions. Furthermore, evaluation of the mitochondrial membrane potential (DYm) in the two fibroblast lines DOA-AA and in two DOA-H fibroblasts, namely those bearing the c.2819-2A>C mutation and the c.2708delTTAG microdeletion, revealed an anomalous depolarizing response to oligomycin in DOA-H cell lines only. This finding clearly supports the hypothesis that these mutations cause a significant alteration in the respiratory chain function, which can be unmasked only when the operation of the ATP synthase is prevented. Noticeably, oligomycin-induced depolarization in these cells was almost completely prevented by preincubation with cyclosporin A, a well known inhibitor of the permeability transition pore (PTP). This results is very important because it suggests for the first time that the voltage threshold for PTP opening is altered in DOA-H fibroblasts. Although this issue has not yet been addressed in the present study, several are the mechanisms that have been proposed to lead to PTP deregulation, including in particular increased reactive oxygen species production and alteration of Ca2+ homeostasis, whose role in DOA fibroblasts PTP opening is currently under investigation. Identification of the mechanisms leading to altered threshold for PTP regulation will help our understanding of the pathophysiology of DOA, but also provide a strategy for therapeutic intervention.

Ownership, Multiple Blockholders and Performance: A study of the Indonesian Banking Industry

The objective of this study is to provide empirical evidence on how ownership structure and owner’s identity affect performance, in the banking industry by using a panel of Indonesia banks over the period 2000–2009. Firstly, we analysed the impact of the presence of multiple blockholders on bank ownership structure and performance. Building on multiple agency and principal-principal theories, we investigated whether the presence and shares dispersion across blockholders with different identities (i.e. central and regional government; families; foreign banks and financial institutions) affected bank performance, in terms of profitability and efficiency. We found that the number of blockholders has a negative effect on banks’ performance, while blockholders’ concentration has a positive effect. Moreover, we observed that the dispersion of ownership across different types of blockholders has a negative effect on banks’ performance. We interpret such results as evidence that, when heterogeneous blockholders are present, the disadvantage from conflicts of interests between blockholders seems to outweigh the advantage of the increase in additional monitoring by additional blockholder. Secondly, we conducted a joint analysis of the static, selection, and dynamic effects of different types of ownership on banks’ performance. We found that regional banks and foreign banks have a higher profitability and efficiency as compared to domestic private banks. In the short-run, foreign acquisitions and domestic M&As reduce the level of overhead costs, while in the long-run they increase the Net Interest Margin (NIM). Further, we analysed NIM determinants, to asses the impact of ownership on bank business orientation. Our findings lend support to our prediction that the NIM determinants differs accordingly to the type of bank ownership. We also observed that banks that experienced changes in ownership, such as foreign-acquired banks, manifest different interest margin determinants with respect to domestic or foreign banks that did not experience ownership rearrangements.

A journey through the capital structure of the banking sector: Empirical evidence for Europe from 2008 to 2012

Systemic risk is the protagonist of the recent financial crisis. This thesis proposes a definition and a propagation mechanism for systemic risk. Risk management has a direct linkage with capital management, when addressing the question that the risk handled by a financial institution is compatible with the amount of equity available. This thesis proposes a risk management of liquid market variables, which compose the assets of a bank, based on the statistical tool of PCA. The principal component analysis will define the PCR, or Principal Components of Risk. Such definition of Risk will be adopted to test if the risk represented by PCR is explanatory of the movements of equity and/or debt for the banks included in the in the index Itraxx financial senior: the results of these regressions will be compared with a formal Capital Adequacy test in order to assess the financial soundness of the main financial European institutions.

Polymerizing activity and regulation of group B Streptococcus pilus 2a sortase C1

Group B Streptococcus [GBS; Streptococcus agalactiae] is the leading cause of life-threatening diseases in newborn and is also becoming a common cause of invasive diseases in non-pregnant, elderly and immune-compromised adults. Pili, long filamentous fibers protruding from the bacterial surface, have been discovered in GBS, as important virulence factors and vaccine candidates. Gram-positive bacteria build pili on their cell surface via a class C sortase-catalyzed transpeptidation mechanism from pilin protein substrates. Despite the availability of several crystal structures, pilus-related C sortases remain poorly characterized to date and their mechanisms of transpeptidation and regulation need to be further investigated. The available three-dimensional structures of these enzymes reveal a typical sortase fold except for the presence of a unique feature represented by an N-terminal highly flexible loop, known as the “lid”. This region interacts with the residues composing the catalytic triad and covers the active site, thus maintaining the enzyme in an auto-inhibited state and preventing the accessibility to the substrate. It is believed that enzyme activation may occur only after lid displacement from the catalytic domain. In this work we provide the first direct evidence of the regulatory role of the lid, demonstrating that it is possible to obtain in vitro an efficient polymerization of pilin subunits using an active C sortase lid mutant carrying a single residue mutation in the lid region. Moreover, biochemical analyses of this recombinant mutant reveal that the lid confers thermodynamic and proteolytic stability to the enzyme. A further characterization of this sortase active mutant showed promiscuity in the substrate recognition, as it is able to polymerize different LPXTG-proteins in vitro.

Sanctions and public enforcement of insider trading laws in Europe

The recent financial crisis triggered an increasing demand for financial regulation to counteract the potential negative economic effects of the evermore complex operations and instruments available on financial markets. As a result, insider trading regulation counts amongst the relatively recent but particularly active regulation battles in Europe and overseas. Claims for more transparency and equitable securities markets proliferate, ranging from concerns about investor protection to global market stability. The internationalization of the world’s securities market has challenged traditional notions of regulation and enforcement. Considering that insider trading is currently forbidden all over Europe, this study follows a law and economics approach in identifying how this prohibition should be enforced. More precisely, the study investigates first whether criminal law is necessary under all circumstances to enforce insider trading; second, if it should be introduced at EU level. This study provides evidence of law and economics theoretical logic underlying the legal mechanisms that guide sanctioning and public enforcement of the insider trading prohibition by identifying optimal forms, natures and types of sanctions that effectively induce insider trading deterrence. The analysis further aims to reveal the economic rationality that drives the potential need for harmonization of criminal enforcement of insider trading laws within the European environment by proceeding to a comparative analysis of the current legislations of height selected Member States. This work also assesses the European Union’s most recent initiative through a critical analysis of the proposal for a Directive on criminal sanctions for Market Abuse. Based on the conclusions drawn from its close analysis, the study takes on the challenge of analyzing whether or not the actual European public enforcement of the laws prohibiting insider trading is coherent with the theoretical law and economics recommendations, and how these enforcement practices could be improved.

The Structure of Financial Supervision: Consolidation or Fragmentation for Financial Regulators?

This research was designed to answer the question of which direction the restructuring of financial regulators should take – consolidation or fragmentation. This research began by examining the need for financial regulation and its related costs. It then continued to describe what types of regulatory structures exist in the world; surveying the regulatory structures in 15 jurisdictions, comparing them and discussing their strengths and weaknesses. This research analyzed the possible regulatory structures using three methodological tools: Game-Theory, Institutional-Design, and Network-Effects. The incentives for regulatory action were examined in Chapter Four using game theory concepts. This chapter predicted how two regulators with overlapping supervisory mandates will behave in two different states of the world (where they can stand to benefit from regulating and where they stand to lose). The insights derived from the games described in this chapter were then used to analyze the different supervisory models that exist in the world. The problem of information-flow was discussed in Chapter Five using tools from institutional design. The idea is based on the need for the right kind of information to reach the hands of the decision maker in the shortest time possible in order to predict, mitigate or stop a financial crisis from occurring. Network effects and congestion in the context of financial regulation were discussed in Chapter Six which applied the literature referring to network effects in general in an attempt to conclude whether consolidating financial regulatory standards on a global level might also yield other positive network effects. Returning to the main research question, this research concluded that in general the fragmented model should be preferable to the consolidated model in most cases as it allows for greater diversity and information-flow. However, in cases in which close cooperation between two authorities is essential, the consolidated model should be used.

Credit-Default-Swaps and the 2008 Financial Crisis: An Inquiry into the Underlying Legal Origins and the European Union’s Regulatory Reforms

After the 2008 financial crisis, the financial innovation product Credit-Default-Swap (CDS) was widely blamed as the main cause of this crisis. CDS is one type of over-the-counter (OTC) traded derivatives. Before the crisis, the trading of CDS was very popular among the financial institutions. But meanwhile, excessive speculative CDSs transactions in a legal environment of scant regulation accumulated huge risks in the financial system. This dissertation is divided into three parts. In Part I, we discussed the primers of the CDSs and its market development, then we analyzed in detail the roles CDSs had played in this crisis based on economic studies. It is advanced that CDSs not just promoted the eruption of the crisis in 2007 but also exacerbated it in 2008. In part II, we asked ourselves what are the legal origins of this crisis in relation with CDSs, as we believe that financial instruments could only function, positive or negative, under certain legal institutional environment. After an in-depth inquiry, we observed that at least three traditional legal doctrines were eroded or circumvented by OTC derivatives. It is argued that the malfunction of these doctrines, on the one hand, facilitated the proliferation of speculative CDSs transactions; on the other hand, eroded the original risk-control legal mechanism. Therefore, the 2008 crisis could escalate rapidly into a global financial tsunami, which was out of control of the regulators. In Part III, we focused on the European Union’s regulatory reform towards the OTC derivatives market. In specific, EU introduced mandatory central counterparty clearing obligation for qualified OTC derivatives, and requires that all OTC derivatives shall be reported to a trade repository. It is observable that EU’s approach in re-regulating the derivatives market is different with the traditional administrative regulation, but aiming at constructing a new market infrastructure for OTC derivatives.