Insolvency Risk Research Articles

Sustainability frontiers of strategic risk management and firm survival: The Altman score effectiveness. A bibliometric analysis

AbstractThe financial networking of companies operating in the globalized market raises the imperative of assessing the risk of insolvency. Business survival is an extremely trending topic in the literature and the managerial context. Risk management requires new perspectives on sustainability. The aim of this work is to verify that Altman's score still maintains its supremacy as the best tool used to investigate the financial insolvency of enterprises. The novelty of the work is the implementation of a bibliometric analysis conducted on Scopus and Web of Science, using analytical software (Bibliometrix R, VOSviewer), identifying future paths of analysis and evaluations of the impact of Altman's methods. Results reveal an exceptional growth in the number of publications on this topic over the last two decades, testifying to its topicality in the academic debate. In light of rising climate change and environmental risks, findings suggested how the Altman score may preserve its function in getting deeper to prevent business bankruptcy. By providing practical evidence, Altman's models encompass a variety of fields, including finance, accounting, economics, management, and all of them addresses the area of sustainability.

Regulatory capital and bank risk-resilience amid the Covid-19 pandemic: How are the Basel reforms faring?

In this paper, we address a long-standing policy question of whether higher levels of regulatory capital, ex-ante, makes banks risk-resilient in times of severe economic downturns. Using the Covid-19 crisis as an exogenous shock to the banking system in a difference-in-difference setting, the results indicate that banks with robust pre-crisis regulatory capital ratios are less risky (have a lower insolvency risk) relative to less-capitalized banks amid the crisis period. Further analyses provides evidence consistent with the presence of a potential credit supply channel. Overall, the results suggests that the post 2007-09 Basel reforms have succeeded, to some extent, in strengthening the risk-resilience of banks during the Covid-19 economic fallout.

Impact of board of directors on insolvency risk: which role of the corruption control? Evidence from OECD banks

This study examines the relationship between corporate governance and banking stability by considering the moderating role of corruption controls. This study applies the Generalized Moments Method using a sample of panel data collected from 74 banks in 10 Organization for Economic Co-operation and Development countries during the period 2006–2016. The empirical results reveal that banking governance is positively associated with banking stability as measured by the Z-score. Additionally, the findings indicate that effective corruption control significantly moderates the power of the board of directors in boosting banking stability. This study discerns the fundamental role of the board of directors as the main corporate governance mechanism and internal player in the stability of banking institutions.

Does bank competition affect bank risk-taking differently?

This paper examines the presence of two competing views—“competition-fragility” and “competition-stability”—in analyzing the impact of competition on bank stability. The approach is to first construct measures of bank competition from a unique dataset of balance sheet and income statements for 542 banks operating in the Philippines from March 2010 to December 2020. The paper then estimates the impact of these competition measures on solvency risk or the risk of being unable to absorb losses with the available capital across universal/commercial banks (U/KBs), thrift banks (TBs) and rural/cooperative banks (R/CBs) industries. Using panel quantile regression, the results reveal that, at the industry level, bank competition reduces solvency risk and that it enhances bank stability. Looking at the risk distribution, the study shows the presence of the competition-fragility and competition-stability hypotheses holding simultaneously for U/KBs suggesting that the effect of competition depends crucially on the underlying individual bank risk. Importantly, the results highlight that the relationship between competition and bank risk is sensitive to other bank-specific characteristics and macro-financial factors related to extent of diversification strategy, cost-to-income ratio, deposit growth, capitalization, changes in the physical banking networks, and growth of real Gross Domestic Product.

Comportamento da banca cooperativa em Portugal: a resiliência do Crédito Agrícola no período de 2007 a 2018

O sistema financeiro é um pilar fundamental no funcionamento eficiente do crédito à economia. A crise financeira teve impacto em todo o sistema financeiro, tornando claro a necessidade de a banca em geral ter necessariamente de passar por um processo de mudança de estratégia, nomeadamente na concessão moderada de crédito. Através de uma análise comparativa da banca cooperativa com a restante banca comercial, para o período de 2007 a 2018, conclui-se que, em Portugal, a banca de matriz cooperativa – representada pelo Sistema Integrado de Crédito Agrícola Mútuo – foi mais resiliente perante a crise económica e da dívida soberana, devido ao seu conservadorismo no rácio de transformação, o que lhe permitiu resultados positivos e não degradação dos seus rácios de capital. Através da aplicação das metodologias HEAT! e z-score, evidencia-se que, no período mais agudo da crise, os indicadores do Crédito Agrícola divergem, favoravelmente, da restante banca comercial, colocando o Crédito Agrícola como uma das instituições bancárias com menor risco de insolvência. Portanto, a liquidez e a orientação de longo prazo, características da banca cooperativa, são essenciais para a sua estabilidade e contribuem para a solidez financeira de todo o sistema.

The Influence of Audit Opinion on Companies’ Insolvency Risk. Evidence for Romania

Due to the increasing confidence of the population in tradable instruments and the opening of horizons towards investment policy, the Bucharest Stock Exchange (BVB) is recording a steady increase in market capitalization, similar to developed capital markets (New York, London, Paris, Tokyo etc.). The financial auditor plays an increasingly active role in the sustainable development of a company, and its opinion is able to influence to a large extent the ability of audited companies to attract capital. The goal of this research is to determine the role of the audit opinion in the sustainable development of a company listed on the Bucharest Stock Exchange and to determine its degree of insolvency using statistical procedures. The results of the research show the importance of financial audit in increasing the financial performance of a company and in the quality of financial reporting, together with determining the influence of audit opinion on the future risk of insolvency.

New solutions for assessing insolvency risk in comercial organizations

In the context of continuous crises that have occurred in the last decade, effective solutions to reduce risks and introduce effective controls into the financial management process in commercial organizations are extremely important. In order to give a new impetus to sustainable economic growth, it is necessary to prioritize the implementation of large-scale reforms, the difficult fiscal situation in a large number of countries, the problems associated with a decrease in the solvency of commercial organizations in the real sector of the economy also require a comprehensive regulatory solution. The main purpose of this article is to offer solutions for controlling financial risks, in particular, for predicting the risk of insolvency, in the context of new ideas of financial management. Alternative methods for assessing the financial condition of commercial organizations, which also include the assessment of solvency, are based on more complex calculations, algorithms and the principle of joint application of a number of methods. From this point of view, a number of researchers in modern conditions prefer cluster analysis. A new approach to assessing and predicting insolvency risks, proposed as a scientific innovation, provides an opportunity to implement new progressive ideas of financial management in commercial organizations.

Retail Central Bank Digital Currencies (CBDC), Disintermediation and Financial Privacy: The Case of the Bahamian Sand Dollar

The fast-growing, market-driven demand for cryptocurrencies worries central banks, as their monetary policy could be completely undermined. Central bank digital currencies (CBDCs) could offer a solution, yet our understanding of their design and consequences is in its infancy. This non-technical paper examines how The Bahamas has designed the Sand Dollar, the first real-world instance of a retail CBDC. It contrasts the Sand Dollar with definition-based specifications. The author then develops a scenario analysis to illustrate commercial bank risks. In this process, the central bank becomes a deposit monopolist, leading to high funding risks, disintermediation risks, and solvency risks for the commercial banking sector. This paper argues that restrictions and caps will be the new specifications of a regulatory framework for CBDCs if disintermediation in the banking sector is to be prevented. The anonymity of CBDCs is identified as a comparative disadvantage that will affect their adoption. These findings provide insight into governance problems facing central banks and coherently lead to the design of the Sand Dollar. This paper concludes by suggesting that combating cryptocurrencies is a task that cannot be solved by a CBDC.

Risk management for integrated power and natural gas systems against extreme weather: A coalitional insurance contract approach

Integrated power and natural gas systems (IPGSs) are vulnerable to extreme weather. The system operators are facing risks of huge economic losses. An insurance could be the appropriate approach for system operators to manage and transfer the risks of huge economic losses to the third-party entities. However, conventional standalone insurance design will induce the free-ride phenomenon and the missing of integration incentive in IPGSs. Thus, to bridge the gaps, we proposed a novel coalitional insurance design for the IPGSs against the extreme weather. To control the risk of insurer insolvency, the premium of the coalitional insurance is determined based on the resilience assessment-based actuarial framework. To provide appropriate incentive in inter-energy assistance, the indemnity is allocated by a combined damage-based and assistance-based policy. Asymmetric Nash bargaining is adopted to ensure the fair allocation of indemnity. Favorable properties include budget balanced, low safe loading cost, free-ride averse, and integration beneficial are theoretically and numerically proved. Numerical tests are conducted on the modified IEEE 39-bus Belgium 20-node IPGS to validate the effectiveness of the proposed coalitional insurance contract design.

The Effect of Board Size, Institutional Ownership and Insolvency Risk on Financial Distress Before and During Covid-19

Purpose: This study investigates the effect of board size, institutional ownership, insolvency risk, and the COVID-19 pandemic on financial distress. This study differs from previous studies because it analyzes financial distress in COVID-19. This study also analyzes the impact of COVID-19 on financial distress for each sector on the Indonesia Stock Exchange.Method: This research applies logistic regression analysis. This study uses data from the financial and annual reports of companies listed on the Indonesia Stock Exchange, which are non-financial sectors from 2018 to 2020. This research covers 1,310 firm years as the object of study.Finding: This study finds that board size and institutional ownership can reduce financial distress risk by carrying out a monitoring function. Higher levels of debt increase the company's insolvency risk, resulting in a higher probability of the company experiencing financial distress. In addition, insolvency risk and the COVID-19 pandemic also influence financial distress, especially for property, real estate, construction building and trade, services, and investment sectors.Novelty: This research enriched the literature by finding out about the impact of the COVID-19 pandemic on financial distress. This research provides new insight regarding the influence of board size, institutional ownership, and insolvency risk on the probability of financial distress by considering the COVID-19 pandemic – the recent conditions when this research was conducted. This study also complements a sector-by-sector analysis that has not been done in previous studies on financial distress during the crisis.

The impact of risk governance structure on bank risk management effectiveness: evidence from ASEAN countries

This study analyzes the effectiveness of bank risk management in ASEAN countries and examines the specific role of risk governance in enhancing a bank's risk management effectiveness. Our results show that the risk management effectiveness of banks in ASEAN countries is low. Furthermore, by focusing on the insolvency risk, credit risk, and operational risk management of banks in ASEAN countries, the dynamic panel models using the two-step GMM method provide evidence that risk governance structure and its effectiveness positively correlate with risk management effectiveness in banks. Based on our findings, the regulators can establish the guidelines related to risk governance to manage a bank's risk management activities and maintain bank stability.

Financial Technology in Indonesia: Effect of Risk on Financial Performance in Peer-To-Peer Lending

This study aims to acquire empirical evidence related to the effect of risk on financial performance in peer-to-peer lending in Indonesia. By exploring the financial statements throughout 2019-2020. The test uses a panel data regression model, the Common Effect Model as the selected estimation regression model. Financial risk is measured by Operating Income Operating Expenses (BOPO), Net Interest Margin (NIM), Loan to Deposit Ratio (LDR), Debt to Asset Ratio (DAR), Debt to Equity Ratio (DER), and Capital Adequacy Ratio (CAR). In contrast, financial performance is measured by Return on Assets (ROA) and Return on Equity (ROE). The results of this study showed that the solvency risk projected by DAR, DER, and CAR had proven to influence the profitability of peer-to-peer lending in Indonesia projected by both ROA and ROE.

Pareto-optimal reinsurance under individual risk constraints

This paper studies the design of Pareto-optimal reinsurance contracts in a market where the insurer and reinsurer maximize their expected utilities of end-of-period wealth. In addition, we assume that the insurer and reinsurer wish to control their solvency risks, which are defined through distortion risk measures of their end-of-period risk exposures. To prevent ex post moral hazard, the no-sabotage condition is exogenously imposed on the set of ex ante admissible indemnity functions. By adopting piece-wise linear distortion functions for the risk measures, we partition the domain of the loss into disjoint pieces as per the features of distortion functions and then derive the parametric form of the optimal indemnity function over each piece, where the parameters are left for numerical optimizations. A concrete example where both the insurer and reinsurer apply Range Value-at-Risk is studied in detail.

DEVELOPMENT OF ECONOMIC MONITORING SYSTEMS OF BUSINESS PROCESSES OF COMMERCIALIZATION OF INTELLECTUAL PROPERTY

The article shows that special attention is currently being paid to the problems of monitoring business processes of intellectual property commercialization. The nationalization of many indicators of innovative activity, the creation of national, sectoral, regional and corporate statistical databases, the determination of data sources and the methodology of their management, accounting, calculation and consumption is a priority of state policy, especially in times of crisis, when enterprises need to improve production efficiency, raise the level competitiveness and implementation of effective forms of management in production management. An important role in the implementation of this task is assigned to the monitoring of the state of the commercial potential of enterprises, since it is one of the most effective methods of diagnosing the industrial, economic and commercial activity of enterprises. Analytical materials prepared during the monitoring process help to carry out a comprehensive analysis and forecast of the company's financial condition and, thereby, to obtain a real assessment of the company's capabilities. It is substantiated that the monitoring of business processes of intellectual property commercialization is one of the most important functions of management in assessing (analyzing) the availability, placement and use of resources of an industrial enterprise. Monitoring is a mechanism for monitoring the most important current results of commercial and intellectual and innovative activities of an industrial enterprise in the conditions of constantly changing market conditions. When forming a system for monitoring business processes of commercialization of intellectual property, it is necessary to select a monitoring object for the purpose of monitoring its current and prospective state, and a monitoring entity that will directly monitor and evaluate the results. The proposed system of indicators for monitoring business processes of commercialization of intellectual property of strategic companies, which should be carried out at the state level, will allow to reduce the risk of insolvency, bankruptcy of these companies, and most importantly - the risk of a negative impact of the deterioration of the commercial and intellectual and innovative state of strategic enterprises on the country's economy as a whole. In this regard, the monitoring of business processes of commercialization of intellectual property of strategic companies will contribute to the timely detection of signs of significant deviations from normal economic development and, thereby, will provide a real opportunity for the government and the management of business structures to take the necessary measures to prevent the emergence and development of crisis situations.

The Liquidity and Indebtness Indicators in Evaluating Bankruptcy Risk Assessment and Insolvency Risk

The Liquidity and Indebtness Indicators in Evaluating Bankruptcy Risk Assessment and Insolvency Risk

Current and prospective estimate of counterparty risk through dynamic neural networks

The estimate of the probability of default plays a central role for any financial entity that wants to have an overview of the risks of insolvency it may incur by having economic relations with counterparties. This study aims to analyze the calculation of such measure in the context of counterparty risk from a current and prospective standpoint, by using dynamic neural networks. The forecasting aspect in the calculation of such risk measure is becoming more and more important over time as current regulation is increasingly based on a "Through the Cycle" and not a "Point in Time" assessment, consequently giving fundamental importance to such estimate. To this end, three different models aimed at calculating the Probability of Default have been investigated: the CDS method, the Z-Spread method, and the KMV method (Kealhofer, Merton and Vasicek). First, the different techniques have been applied to one of the main suppliers of gas and energy in Italy as a reference company. Then, they have been applied to calculate the same risk measure on the 50 companies included in one of the most important European indices, the Euro Stoxx 50.

The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis

Despite a formal 'no-bailout clause; we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal, and Spain, ranging from roughly 0.5% (Ireland) to a whopping 43% (Greece) of2010 output during the Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a 'Southern view' of the crisis (transfers did not help) and a 'Northern view' (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of 'kicking the can down the road.' Mapping the model to the estimated transfers, we find that the main purpose of the outsized Greek bailout was to prevent an exit from the eurozone and possible contagion. Bailouts to avoid sovereign default were comparatively modest.

Supporting SMEs during COVID-19: The case for targeted equity injections

We analyze the potential role of equity injections in addressing solvency risks among small and medium-sized enterprises (SMEs) after the COVID-19 crisis. Building on firm-level balance sheet projections for a sample of European economies, we simulate selected policy interventions and find that equity injections are quite effective at dampening the rise in insolvencies. Cost effectiveness requires careful targeting, however; under an illustrative scenario, leaving aside any costs arising from imperfect information and implementation, the cost of a program targeting only those SMEs worth saving is just a tenth of the cost of an untargeted approach directed to all insolvent firms. Overall, our paper provides a case for governments to rely more on targeted equity injections in responding to major shocks that trigger mass solvency risks.

Supply chain finance for ameliorating and deteriorating products: a systematic literature review

Ameliorating and deteriorating products, or, more generally, items that change value over time, present a high sensitiveness to the surrounding environment (e.g., temperature, humidity, and light intensity). For this reason, they should be properly stored along the supply chain to guarantee the desired quality to the consumers. Specifically, ameliorating items face an increase in value if there are stored for longer periods, which can lead to higher selling price. At the same time, the costumers’ demand is sensitive to the price (i.e., the higher the selling price the lower the final demand), sensitiveness that is related to the quality of the products (i.e., lower sensitiveness for high-quality products). On the contrary, deteriorating items lose quality and value over time which result in revenue losses due to lost sales or reduced selling price. Since these products need to be properly stored (i.e., usually in temperature- and humidity-controlled warehouses) the holding costs, which comprise also the energy costs, may be particularly relevant impacting on the economic, environmental, and social sustainability of the supply chain. Furthermore, due to the recent economic crisis, companies (especially, small and medium enterprises) face payment difficulties of customers and high volatility of resources prices. This increases the risk of insolvency and on the other hand the financing needs. In this context, supply chain finance emerged as a mean for efficiency by coordinating the financial flow and providing a set of financial schemes aiming at optimizing accounts payable and receivable along the supply chain. The aim of the present study is thus to investigate through a systematic literature review the two main themes presented (i.e., inventory management models for products that change value over time, and financial techniques and strategies to support companies in inventory management) to understand if any financial technique has been studied for supporting the management of this class of products and to verify the existing literature gap.

Determinants and consequences of SME insolvency risk during the pandemic

The COVID-19 pandemic posed an existential threat to European SMEs' financial resilience with significant consequences for the European economy. Using unique firm-level data on SME financing conditions, this paper proposes a new insolvency risk measure based on survey responses. We show that SME insolvency risk increased, on average, by approximately 21% during the pandemic. Problems with finding customers and the cost of production and labor contributed notably to SME insolvency risk during this period, and SMEs also saw deterioration in their access to finance. Innovation worked as a mitigating factor during the pandemic, and innovative SMEs were more resilient, maintained their client base, and saw favorable access to bank lending. Our results point out that SME innovation can prevent the number of insolvencies from rising significantly in the long term.