Insolvency Risk Research Articles

Monetary policy and risk of commercial banks in Vietnam

This study investigates the bank risk-taking channel of monetary policy transmission by comprehensively analyzing multiple bank risk measurements amid monetary policy shocks in Vietnam. Using banking data for 2008–2021, a dynamic panel model is estimated to examine the risk exposure of 30 Vietnamese commercial banks. The paper employs the annual M2 money supply growth as a monetary policy variable, besides two policy interest rates established by the central bank. We find that an expansion of monetary policy benefits the quality of loan portfolios; however, reduced interest rates or an extended money supply increase insolvency risk. We also document that heightened economic growth corresponds to a reduced likelihood of credit and insolvency risks, while a surge in the inflation rate leads to an escalation in insolvency risk, manifested by a decline in the Z-score index. Overall, the findings on different risk dimensions in this paper are expected to draw a comprehensive picture of banks’ risk appetite and behavior in response to monetary changes.

Navigating the Risk Terrain in Small Business Economics

This article explores various methods for analyzing and assessing the risks faced by small businesses, emphasizing economic and financial indicators. Key areas of risk assessment include identification, analysis, and comparative evaluation of risks, each employing specific tools. The study highlights the importance of understanding operational risks, based on ISO 31000:2009 standards, and provides detailed methods for evaluating risks related to assets, solvency, and financial stability. It also discusses the implications of liquidity and solvency risks on business operations, offering a structured approach to mitigating these risks. Highlights: Identify Risks: Focus on assets, solvency, and liquidity risks. Operational Standards: Use ISO 31000:2009 to manage operational risks. Financial Analysis: Evaluate stability and solvency for business growth. Keywords: Risk Assessment, Small Businesses, Economic Indicators, Financial Stability, ISO 31000

The impact of the COVID-19 pandemic on the financial performance and stability of Islamic banks

Purpose The purpose of this paper is to investigate the impact of the COVID-19 pandemic on the financial performance and stability of Islamic banks (IBs) in the Middle East, North Africa and Southeast Asia (MENASA) region. Design/methodology/approach The sample consists of 50 IBs across 13 MENASA countries. The data covers 11 quarters, starting in Q1 2019 and ending in Q3 2021, and are collected from banks’ quarterly reports. The authors proxy financial performance by three measures, namely, return on assets (ROA), return on equity (ROE) and cost-to-income (Cost/Income). For financial stability, the authors use two indicators: insolvency risk (log Z-score) and asset risk (ROA/SDROA). The methodology is based on the generalized least squares method estimation. Findings The results showed a significant and negative impact of COVID-19 on two performance measures of IBs (ROA and ROE) suggesting that IBs were significantly affected during the earlier pandemic. As well, the authors found strong evidence of the impact of COVID-19 on the insolvency risk and asset risk of the studied banks. Practical implications The study of COVID-19’s impact on the performance and stability of IBs in MENASA countries permits the banks’ regulators and policymakers to ameliorate the banks’ financial performance and reinforce their supervisory actions. Also, it gives them assistance to guarantee the financial stability of these banks in times of crisis. Originality/value This study provides significant financial information and policy implications for stakeholders involved in the banking sector in MENASA countries. Consequently, IBs must guarantee their profits and stability to ensure their competitiveness versus conventional banks during the period of crisis.

Panel Data Analysis in Identifying and Mapping Caused Factors of Financial Crises and Monetary Instability in Developing Countries

This study aims to reveal the extent of macroeconomic instability, which has the characteristics of a financial crisis and inflation. To test the hypothesis, researchers use fixed effects and random effects estimators to assess the presence of individual and temporal effects. Macroeconomic fundamentals, especially the risk of devaluation and a drop in economic activity can be seen as early warning signs of banks becoming less solvent. They also play a big role in explaining how deposits changed during the crisis. Our findings highlight the unique features of the convertible monetary regime, reinforcing the belief that debtors will enjoy permanent protection against devaluation risks. This perception encourages the dollarization of bank portfolios, thereby increasing the financial system's solvency risks. There is also evidence that the regulatory framework in this area is weak when it comes to the financial system's exposure to devaluation risks and public debt risks. This is especially true when it comes to an institutional framework that makes it hard for government funding to be changed into other currencies. We find that inflation is a very persistent process during periods of high inflation. However, with the decline in inflation after the implementation of the convertibility regime, its persistence reduced significantly. The results show that non-rational persistence is currently not very high, suggesting that the costs of designing the economy should not be either. We find that univariate models tend to perform better over very short horizons. The results suggest that there may be advantages to using a combination of different models, provided they are informative about the relationship between inflation and its short- and long-run determinants.

The Impact Of Insolvency Risk On Profitability Of Banking System

The Impact Of Insolvency Risk On Profitability Of Banking System

Market power and bank risks: insights from India and Bangladesh

PurposeThis study aims to investigate whether various types of risks faced by the publicly listed commercial banks of India and Bangladesh are driven by market power and provides comparative insights from both economies.Design/methodology/approachBy using the adjusted Lerner index to gauge bank market power and applying the generalised methods of moments (GMM) regression approach, the research delved into the relationship between bank market power and three distinct facets of risk across a sample of 26 publicly listed commercial banks in India and 22 listed banks in Bangladesh spanning from 2011 to 2022.FindingsThe results indicate that for Bangladesh, both “competition fragility” and “competition stability” viewpoints coexist simultaneously across all risk types, supporting a nonlinear relationship between market power and risk. However, in the Indian context, a nonlinear association exists only in the case of credit risk, while the relationship with insolvency risk is linear, substantiating the “competition fragility view”. Apart from market power and bank-specific variables, GDP growth rate has emerged as a prominent driver across all risk categories in both countries.Research limitations/implicationsThe filtration of banks is a limitation that might have influenced the outcomes. This study recommends that the Reserve Bank of India encourages further bank consolidation. Along the same line, Bangladesh Bank should closely oversee the growing competitive landscape. Furthermore, the regulators must monitor the elevated levels of non-performing loans to reduce credit risk so as to bolster the stability of their respective banking sectors.Originality/valueThis comparative study is the first attempt to analyse the market power and risk relationship and includes a novel bank-specific variable, i.e. technology, apart from other established variables.

Property Separation. Responsibility of Heirs as a Case Study

The paper is devoted to the problem of legal separation of the testator’s property from the property of the heirs. The legal separation of property is understood as giving it a specific legal regime, including the division of property into different pools of assets owed to different creditors. In the comparative legal aspect, the author examines the practical advantages and disadvantages of various models of legal separation of inherited property or the absence of separation. The paper analyzes the problems of Russian regulation of the liability of heirs: the legislative certainty of the liability model; the perception of this model by judicial practice and doctrine; the fairness of the current distribution of risks of insolvency and destruction of inherited property between creditors of the heir and the testator; features of bankruptcy of the estate. Using the case of inherited property, general conclusions are formulated concerning the phenomenon of detached property as an independent phenomenon of civil law, different from the institution of limited liability and the phenomenon of a legal entity.

Measuring Solvency Risk Using Flexible Distributions: An Analysis for the Colombian Banking System

This paper proposes using Gram-Charlier Type A probability distributions to measure solvency risk. The method assesses the likelihood of a bank’s solvency falling below the minimum ratio set by regulators. Applied to 15 banks in Colombia, the study reveals the importance of considering the proximity of the Capital Adequacy Ratio (CAR) to the regulatory minimum and the probability distribution of solvency changes. Gram-Charlier Type A functions offer a better fit than the normal distribution. These findings hold significance for regulators and decision-makers, emphasizing the need to incorporate suitable measures for assessing solvency risk in banks.

Does digital transformation reduce bank's risk-taking? evidence from vietnamese commercial banks

This study examines whether digital transformation reduces banks' risk-taking in the Vietnamese commercial banking sector. Our research sheds light on how banks' digital transformation affects their risks, specifically regarding credit, insolvency, and liquidity. The study utilizes the readiness index for the Vietnamese commercial banks' Information and Communication Technology (ICT) Index, which the Vietnamese government has officially constructed. The OLS, PCSE, and FGLS models are employed to analyze how digital transformation reduces banks' risk-taking based on the longitudinal data from 26 commercial banks in Vietnam from 2013 to 2022. The results indicate that digital transformation significantly reduces credit risk by improving risk management capacity and reducing asymmetric information. It also helps mitigate insolvency risk by lowering costs and increasing profitability. However, digitalization does not significantly impact liquidity risk as digital channels leverage banks' lending and deposit activities. This research provides empirical evidence on the role of bank digitalization in risk-taking and concludes with recommendations for developing bank digital transformation in Vietnam and other developing countries, including suggestions for further research in this area.

The Impact of Insolvency and Bankruptcy Code 2016: A Comprehensive Study

Insolvency and bankruptcy have emerged as significant concerns in the global economy, impacting firms, economies, and individuals alike. Economic volatility, high corporate debt levels, industry disruptions, and inadequate financial management contribute to the escalation of insolvency risks. The COVID-19 epidemic has made these difficulties worse., leading to a surge in bankruptcy filings worldwide. In response to the need for efficient resolution mechanisms, India introduced Insolvency and Bankruptcy Code, 2016 (IBC), introduced for streamlining insolvency proceedings and protecting stakeholders' interests. While the IBC has achieved notable successes in resolving cases, challenges still must be addressed, including declining recovery rates and prolonged resolution times.

Empirical relationship between board characteristics, earnings management, insolvency risk, and corporate social responsibility

Empirical relationship between board characteristics, earnings management, insolvency risk, and corporate social responsibility

Unveiling the Symphony of Economic Policies on Corporate Financial Performance: A Quantitative Revelation through SMARTPLS Analysis

This research investigates the influence of economic stimulus policy, fiscal policy, and the solvency risk of companies on their financial performance. Utilizing a quantitative approach, the study adopts regression analysis through SMARTPLS to analyze the data. Primary data for the variables - impact of economic stimulus policy, solvency risk of companies, and fiscal policy - were gathered, along with secondary data over a five-year period pertaining to the financial performance variable. The dataset was derived from 26 manufacturing companies listed on the Indonesia Stock Exchange (BEI). The findings reveal that both economic stimulus policy and fiscal policy exert a positive and significant effect on financial performance. In contrast, the solvency risk of companies does not exhibit a significant impact. This outcome suggests that while macroeconomic policies facilitate an environment conducive to financial growth, the internal risk management and financial structuring of a company play a critical role in leveraging these external benefits. The study underscores the importance of strategic internal management and effective risk mitigation practices in enhancing and sustaining financial performance amidst varying economic policies.

Impact of specific liquidity shocks on the bank's solvency

PurposeThis study aims to demonstrate and measure the impact of liquidity shocks on a bank’s solvency, especially when the bank does not hold sufficient liquid assets.Design/methodology/approachThe proposed model is an extension of Merton’s (1974) model. It assesses the bank’s probability of default over one or two (short) periods relative to liquidity shocks. The shock scenarios are materialised by different net demands for the withdrawal of funds (NDWF) and may lead the bank to sell illiquid assets at a depreciated value. We consider the possibility of second-round effects at the beginning of the second period by introducing the probability of their occurrence. This probability depends on the proportion of illiquid assets put up for sale following the initial shock in different dependency scenarios.FindingsWe observe a positive relationship between the initial NDWF and the bank’s probability of default (particularly over the second period, which is conditional on the second-round effects). However, this relationship is not linear, and a significant proportion of liquid assets makes it possible to attenuate or even eliminate the effects of shock scenarios on bank solvency.Practical implicationsThe proposed model enables banks to determine the necessary level of liquid assets, allowing them to resist (i.e. remain solvent) different liquidity shock scenarios for both periods (including eventual second-round effects) under the assumptions considered. Therefore, it can contribute to complementing or improving current internal liquidity adequacy assessment processes (ILAAPs).Originality/valueThe proposed microprudential approach consists of measuring the impact of liquidity risk on a bank’s solvency, complementing the current prudential framework in which these two topics are treated separately. It also complements the existing literature, in which the impact of liquidity risk on solvency risk has not been sufficiently studied. Finally, our model allows banks to manage liquidity using a solvency approach.

Terms of Insurance for Nuclear Damage

This study addressed the regulations of nuclear damage insurance, by elucidating the concept of nuclear damage insurance, its characteristics, and its effects. Furthermore, the study delineated the insurer's obligation to provide financial guarantees for compensation for nuclear damages, through an exposition of the scope of nuclear damage insurance and its problems and addressing the conglomerations of nuclear operators. It was recommended that contemporary insurance companies and systems should abandon traditional methods in the field of nuclear damage insurance. This entails devising insurance approaches and treatments that align with the magnitude and nature of nuclear damage. Additionally, it is imperative for states to support and protect the insurance sectors from the risk of insolvency or bankruptcy, which leads to shirking their responsibilities and obligations towards nuclear operators or the afflicted parties.

Risks and financial performance of Indian banks: a cursory look at the COVID-19 period

PurposeThe novel coronavirus (COVID-19) has caused financial stress and limited their lending agility, resulting in more non-performing loans (NPLs) and lower performance during the II wave of the coronavirus crisis. Therefore, it is essential to identify the risky factors influencing the financial performance of Indian banks spanning 2018–2022.Design/methodology/approachOur sample consists of a balanced panel dataset of 75 scheduled commercial banks from three different ownership groups, including public, private and foreign banks, that were actively engaged in their operations during 2018–2022. Factor identification is performed via a fixed-effects model (FEM) that solves the issue of heterogeneity across different with banks over time. Additionally, to ensure the robustness of our findings, we also identify the risky drivers of the financial performance of Indian banks using an alternative measure, the pooled ordinary least squares (OLS) model.FindingsEmpirical evidence indicates that default risk, solvency risk and COVAR reduce financial performance in India. However, high liquidity, Z-score and the COVID-19 crisis enhance the financial performance of Indian banks. Unsystematic risk and systemic risk factors play an important role in determining the prognosis of COVID-19. The study supports the “bad-management,” “moral hazard” and “tail risk spillover of a single bank to the system” hypotheses. Public sector banks (PSBs) have considerable potential to achieve financial performance while controlling unsystematic risk and exogenous shocks relative to their peer group. Finally, robustness check estimates confirm the coefficients of the main model.Practical implicationsThis study contributes to the knowledge in the banking literature by identifying risk factors that may affect financial performance during a crisis nexus and providing information about preventive measures. These insights are valuable to bankers, academics, managers and regulators for policy formulation. The findings of this paper provide important insights by considering all the risk factors that may be responsible for reducing the probability of financial performance in the banking system of an emerging market economy.Originality/valueThe empirical analysis has been done with a fresh perspective to consider unsystematic risk, systemic risk and exogenous risk (COVID-19) with the financial performance of Indian banks. Furthermore, none of the existing banking literature explicitly explores the drivers of the I and II waves of COVID-19 while considering COVID-19 as a dependent variable. Therefore, the aim of the present study is to make efforts in this direction.

The impact of CEO turnover on firm performance and insolvency risk - A global analysis

This research examines the impact of CEO change on company performance by analyzing a global sample of publicly listed firms. The findings demonstrate a significant positive association between CEO change and improvement in a company's Z-Score, indicating the strategic change that a new CEO can bring all over the world regardless of the corporate governance model adopted and cultural differences. The study also finds that the positive impact of CEO turnover on firm performance is present only in the short term (first two years) and are more evident for companies in crisis.

The Effect of Financial Risk on Financial Performance in the Non-Cyclical Consumer Industry Listed on the BEI

Financial performance refers to the assessment of a company's accomplishments concerning its overall health within a specific timeframe. This study aimed to investigate the impact of financial risk on the financial performance of non-cyclical consumer sector companies listed on the Indonesia Stock Exchange. The objective was to analyze how financial risk influences operational risk, market risk, liquidity risk, credit risk, solvency risk, and control variables, namely company size and leverage, on return on equity-a key metric for measuring financial performance. The study focused on the 52 non-cyclical consumer industry companies listed on the Indonesian Stock Exchange for the period spanning from 2018 to 2022. Employing a quantitative approach, the research utilized secondary data collected from audited annual reports. Panel data regression models were employed for testing purposes. The findings revealed that market risk and credit risk exerted a negative influence on financial performance, whereas liquidity risk, solvency risk, and operational risk demonstrated no significant impact on financial performance. The implications of this research provide financial managers with insights into optimizing financial performance to attain organizational objectives, particularly in enhancing shareholder welfare.

Financial technology and banking market discipline in Indonesia banking

PurposeThis study aims to assess the effectiveness of the banking market discipline in relation to the development of Financial Technology (FinTech) startups.Design/methodology/approachUsing panel data collected from 144 banks in Indonesia from 2004 to 2018, this study’s regression models were estimated using fixed effects with robust standard errors.FindingsThis study finds that FinTech startups disturb bank deposits. Meanwhile, market discipline exists in Indonesian banks, as indicated by depositors’ behavior with higher credit and liquidity risks. However, market discipline does not exist for bank insolvency risk, which is indicated by a significant and positive relationship with the dependent variable. Therefore, the higher the number of FinTech startups, the more effective the market discipline. Empirical findings also revealed that the joint impact between FinTech startups and bank risk is also important in explaining the difference in the effectiveness of banking market discipline.Practical implicationsThis study has policy implications for banks in mitigating risk associated with market discipline and instability of financial intermediation.Originality/valueThis study offers a significant contribution to the empirical literature because it specifically explores the effectiveness of the banking market discipline by focusing on the joint impact of FinTech startups and bank risk on deposits. Furthermore, this study contributes to providing empirical evidence that links between FinTech startups and bank risk affect depositor behavior at government-owned, private, large and small, as well as nonmobile and mobile adoption banks.

The Impact of Corporate Governance on Financial Performance in Professional Sports Clubs: The Case of Italian Serie A

This paper explores professional football clubs' corporate governance challenges, recognizing them as symptoms of a deeper management crisis. The need for more effective managerial practices within these organizations is evident in the prevailing issues. This study aims to assess how corporate governance quality impacts the profitability and sustainability of Italian Serie A football clubs. Through the analysis of governance variables and financial indicators from the 2018/2019 season, the research identifies crucial factors. These factors encompass the business model, board composition, board age, control bodies, and internal procedure transparency. The results highlight the significant influence of corporate governance variables on club performance and insolvency risk. Enhanced governance quality is associated with higher profitability and viability, even among clubs facing financial difficulties. These findings hold significance for academics, practitioners, and regulators interested in understanding corporate governance practices within the competitive soccer market and their impact on financial performance. Future research should expand the sample and incorporate a comparative analysis of major European football leagues, accounting for varying legal frameworks. Moreover, the repercussions of the COVID-19 pandemic on the football industry must be considered in forthcoming investigations. The pandemic's financial consequences will likely differ based on each club's business model, international reputation, financial structure, and governance approach.

Assessment of restraining factors in financing climate transition programs for agricultural organizations

Agriculture is fraught with numerous risks that can lead to bankruptcy for agricultural enterprises and hinder the climate transition. It is possible to increase the volume of financing for climate transition programs if you understand the level of financial stability of enterprises and correctly assess the risk factors that hinder sustainable development. This research focuses on evaluating the ability of agricultural enterprises to finance climate transition programs. The article examines quantitative indicators of the financial condition and performance efficiency of the agro-industrial complex industry and the largest agricultural enterprises for 2015 and 2023. By using comparative analysis methods and official statistics data, we arrive at a conclusion regarding the main problems associated with the risks of insolvency and reduced financial stability, the prerequisites for the financial insolvency of agricultural enterprises, and the increasing burden on the budget system due to the measures of state support. The livestock industry demonstrates poorer performance than the crop production industry. We propose to use economies of scale and form mixed farms, combining crop farming with livestock farming. This will help reduce negative risk factors and ensure financing for climate transition programs.