Insolvency Risk Research Articles

Measuring technical efficiency associated with environmental investment: does market competition and risk matters in banking sector.

This paper investigates the impact of several comprehensive risks such as credit risk, capital risk, liquidity risk, and insolvency risks on Pakistani banks' technical efficiency to assess the nexus between environmental investments with technical efficiency of banks. It also probes into the effect of competition among the Pakistani banks on technical efficiency. The data envelopment analysis (DEA) CCR and BCC models are used to estimate technical, purely technical, and scale efficiencies of the Pakistani banks. The Lerner index measures the banking competition. For estimation, the bootstrap truncated regression is used as an econometric technique. The robustness of results is cross-checked by using an alternative econometric technique (fractional logit regression) and an alternative competition measure (Boone indicator). The study revealed that capital risk has a positive impact on scale efficiency and insolvency risk has a negative impact on technical and pure technical efficiencies. Similarly, there is a positive significant relationship between technical efficiency and environmental investment. Furthermore, the competition has a significant negative effect on Pakistani banks' technical and pure technical efficiencies. The results suggest that the efficiency of the Pakistani banks is significantly affected by bank size, taxation, diversification, operational cost management, banking development, trade openness, and infrastructure development, which ultimately promotes environmental efficiency and protection. The comparative study indicates that the state-owned banks have higher technical, pure technical, and scale efficiencies than the private, foreign, and Islamic banks.

Impacts of the sovereign risk perception on financial stability: Evidence from Brazil

Credit Rating Agencies (CRAs) provide credit information related to sovereign bonds and play a crucial role in international financial markets. This study investigates whether CRAs sovereign credit news such as rating changes, outlook, and credit watch status affects Brazil’s financial stability as represented by credit risk and solvency risk of Brazilian banks. Using a panel with a sample of 125 banks, the results reveal that the sovereign credit news alters credit risk coverage (credit provisions) and solvency risk (capital buffer) secured by Brazilian banks. The improvement of Brazilian sovereign risk leads banks to reduce their protections against credit risk (credit provisions) and capital level, which can threaten financial stability.

Revisiting British Investment in Latin America: The River Plate Trust Group, 1879–1963

The article analyses the performance and profitability of the firms controlled by the River Plate Trust Group in Argentina and Uruguay from 1879 to 1960 to challenges the notion that British investments in the Southern Cone involved greater default or insolvency risks because of nationalism, expropriations, and over-taxation. Also known as Morris or Morrison group, River Plate Trust became the most important British business group in the region during the First Global Period, as it controlled a number of public utilities, mortgage and financial firms. Our case shows that the decline of British investment in mortgage and financial activities did not mark the end of this business cycle after WWI; rather, it signalled a change in the direction of capital flows. Capital outflows from host economies to Great Britain—via dividends—continued over the interwar period, with only a brief interruption between 1931 and 1934. The business cycle of British firms entered a new phase, characterized by stagnant British investments and increasing capital returns from Argentina and Uruguay to Great Britain.Moreover, British public utility firms continued to invest in the River Plate until the 1940s, because profits from the region supported the distribution of high dividends to shareholders.

ASSESSMENT OF THE LEVEL OF ECONOMIC SECURITY OF INNOVATIVE ENTERPRISES: ECONOMIC AND LEGAL ASPECT

Abstract. Ukraine’s desire to integrate into the international economic space poses significant obstacles to innovative enterprises due to the destabilizing impact of globalization. Among the most important are financial, economic and political instability, risks of insolvency and reduced financial stability, which leads to the inability to meet external and internal challenges and ensure the optimal level of economic security. Under such conditions, the need to effectively counteract the destabilizing factors and ensure high rates of efficiency and profitability, which can be achieved through innovation and improvement of financial relations. Innovative activity, despite its high cost and significant level of risk, is one of the priorities of the enterprise. The activities of innovative enterprises attract the attention of economic agents, so ensuring the proper level of their economic security is no less important. Given that there is still no single unified and legally established method of calculating the level of economic security of enterprises, it is important to find the most acceptable and rational methods of calculating the level of security of enterprises, as well as developing a legal mechanism for their consolidation, which is the focus of scientists and practitioners for a long time. However, the problem has not yet been resolved. The article examines the main approaches to assessing the level of economic security of innovative enterprises and identifies the importance of the factor of innovation and legal regulation of financial relations with other economic agents. The main indicators of economic security of the enterprise are systematized and their classification into macroeconomic, financial, foreign economic, investment, scientific and technological, as well as production is performed. The method of assessment the level of economic security of an innovative enterprise using the Solow model is substantiated and proposed. Keywords: innovations, Solow model, indicators of economic security of the enterprise, integrated indicator of the level of economic security of the enterprise. JEL Classification С13, С51, О47, О33 Formulas: 39; fig.: 1; tabl.: 0; bibl.: 11.

Artificial Intelligence Approach to Secure Pension Fund

Pension fund needs to produce a high-income return to face actuarial expectations of different kinds of benefits. An asset allocation management model of a pension fund must consider a large planning horizon because of its long-term obligations. Asset allocation controls the solvency of the fund by suitable investments and contribution policies to secure the pensioner’s future liabilities. Artificial intelligence approaches given by experts and accepted by decision-makers, provide a powerful tool for describing uncertainty. A portfolio optimization model is introduced based on variance minimization at a required return level that secures the fund against insolvency risk. This method uses an artificial Bee ColonyOptimizationApproach to the mean-variance defined by Markowitz so that future returns of the stocks are predicted where the ability of AI to improve predictive and prescriptive financial forecasting processes will change the world of finance management.

Quantitative easing and agency MBS investment and financing choices by mortgage REITs

AbstractWe study Agency Mortgage Real Estate Investment Trusts (Agency MREITs)—shadow banks that invest in guaranteed U.S. Agency mortgage‐backed securities (MBS) and that are principally funded with repo debt—to test how quantitative easing (QE) affects financial risk taking. Agency MREIT asset growth is inversely related to the Federal Reserve's Agency mortgage‐backed securities (MBS) purchases, reflecting investor portfolio rebalancing. Agency MREITs increased leverage during QE, consistent with “reaching for yield.” They countered the heightened solvency risk by extending repo maturity and increased hedging of funding costs to reduce liquidity and interest rate risk. Research linking QE to increased credit risk taking should account for contemporaneous changes in financing choices and risk management.

Tail index-linked annuity: A longevity risk sharing retirement plan

This paper proposes an innovative retirement product focusing on longevity risk sharing, a contract we refer to as tail index-linked annuity (TILA). Specifically, the proposed TILA pays out variable annual payments, which will be equal to a regular nominal amount when a reference survival index is lower than a predetermined threshold (i.e. normal evolution of longevity risk), and a reduced, index-dependent payment when the threshold is passed (i.e. highly unfavorable evolution of longevity risk). The proposed TILA aims at not only improving the benefits of the policyholders, which has been the focus in recent literature on innovative retirement products, but also reducing the longevity risk exposure of the insurer, particularly for advanced retirement ages. Using real-world mortality data and a stochastic multi-population mortality model, we find that the proposed TILA leads to higher expected lifetime utility than regular annuities for policyholders with different degrees of risk aversions. Meanwhile, numerical analysis shows that the proposed TILA could greatly mitigate the solvency risk of the insurer, leading to a substantially lower loss probability and expected (tail-) loss than regular annuities in the presence of a longevity shock, and therefore could reduce the insurer's required solvency capital under the latest solvency regulations.

Predicting the Risk of Insolvency in Small Enterprises: Critical Analysis of the Predictive Model Associated with the New Italian Code of Business Crisis

Numerous studies have been conducted to verify whether, and under what conditions, Altman's Z-Score model can also be applied to unlisted, non-US companies. The response of numerous studies confirms the substantial validity of this algorithm. However, in Italy, the legislator, in launching the new Business Crisis Code in 2019, in adherence to an important European recommendation, did not adopt the aforementioned model but approved a different one. In order to find a justification for this choice, the present work intends to test the effectiveness of the warning indices that will be adopted in Italy by comparing them with the Altman predictive model in the Z'' Score version. To this end, the two models were applied to the balance sheets of 789 Italian firms that went bankrupt in the period 2016-2018 and, at the same time, to a control sample, equal in number and composition, of non-bankrupt firms.
 
 The results of this analysis produced two distinct findings. The Italian method proved to be less effective in predicting a crisis than the Z'' score. but more effective in determining whether a firm is truly healthy. This evidence is useful to confirm once again the effectiveness of the Z'' Score in a non-American context but also, and above all, to provide suggestions to the Italian legislator so that it can refine the predictive model currently in force.

Insolvency Risk and Value Maximization: A Convergence between Financial Management and Risk Management

This conceptual paper focuses on the relationship between insolvency, capital structure, and value creation. The aim is twofold: to define risk-based capital measures able to absorb the effects of financial distress and avoid corporate default; and to verify conditions and limits of use of these measures in corporate financial policies. The capital measures based on insolvency risk will be defined by recalling the concepts of Cash Flow-at-Risk and Capital-at-Risk. A first check on the usefulness of these risk-based measures and their consistency with the principle of value maximization is carried out through a simulation model. The scenario analysis allows us to examine how financial and risk policies oriented by insolvency avoidance affect the firm value. According to evidence from the simulation model, these measures appear to be useful in lowering the default risk, but they require a continuous assessment of their impact on the firm value.

THE IMPACT OF RISK MANAGEMENT ON FINANCIAL PERFORMANCE

Commercial banks that control a large proportion of overall assets of the financial sector primarily rely on extending credits, and banks may raise their earnings through this function which constitutes one of the major functions of commercial banks. 
 Consequently, and due to the wide multiple risk exposures of commercial banks, the issue of capital structure has become a vital element in determining the viability of banks and their ability to withstand various risks involved. Hence, risk management as such has become an essential part of evaluating various risks, including credit risks, liquidity risks, solvency risks and so forth.
 It is necessary to remember that banks differ from one to another in many respects, namely, their goals, services and strategies. Thus, banks are facing various risks in their day-to-day operations.
 The research here has implemented a quantitative methodology throughout distributing a survey over a defined number of respondents, and the results were viewed through the prism of regression analysis and Pearson correlations. The obtained results prove there is a direct relationship between market risk, liquidity risk, credit risk, and solvency risk. The results also prove that the higher the risk management ratios are managed, the higher the net income will be.

Methodological approaches to the development of a digital model for analysis and evaluation of insolvency of joint-stock machine companies

In this article, the application of the policy for managing the risk of insolvency is relevant, methodological approaches to the development of a digital model for analyzing and assessing the risk of insolvency are considered, which is focused on the universal concept of liquidity management for a machine-building company, taking into account the following algorithm: the principle of effective management of the structure of working capital; the principle of efficient use of financial resources; the principle of restoring solvency; the principle of effective management of borrowed funds and the principle of effective use of labor resources.

Effects of wealth management products on bank risk in China: The role of audit committee effectiveness

AbstractUsing data from 114 Chinese banks from 2009 to 2018, we examine the effects of wealth management products (WMPs) on bank risk and the role of audit committee effectiveness. Three main results emerge. First, WMPs increase bank risk, especially insolvency risk, portfolio risk, leverage risk, and ROA volatility. Second, the effects of WMPs on bank risk are weaker in banks whose audit committee members have more financial expertise or longer board tenures. Third, further results show that: (a) principal‐guaranteed WMPs have weaker effects on bank risk than principal‐floating WMPs; (b) the policy known as “Notice 8” issued in 2013 weakens the effects of WMPs on bank risk; and (c) short‐term WMPs have stronger effects on bank risk than medium‐term and long‐term WMPs.

Financial health of Syariah and non-Syariah banks: a comparative analysis

PurposeThis paper aims to investigate whether Syariah banks are more financially stable than non-Syariah banks and check the differential impact of explanatory variables in financial health and efficiency in the context of Indonesia.Design/methodology/approachBy using unbalanced panel data from Bankfocus over the period 2011–2018, regression analysis is performed with two response variables representing financial health, ZSCORE for return on average assets, liquid asset to deposit and short-term funding ratio. A number of control variables are used as tools to confirm the hypotheses. To check the robustness of the findings, a model with different specifications has been used.FindingsThe results indicate that while Syariah banks present higher insolvency risk (less health) for long-term activity, the opposite is true for short-term activity. Other findings show that Syariah and non-Syariah banks contribute differently to the national system of financial stability owing to varying influential factors on the bank’s health.Originality/valueThis paper presents a comparative analysis between the financial stability of Syariah banks and that of non-Syariah banks in Indonesia by building an empirical framework that allows the author to examine the differential effects of each underlying feature on financial stability in Syariah and non-Syariah banks.

Voluntary Disclosure of GRI and CSR Environmental Criteria in Colombian Companies

The study analysed the asymmetry in the disclosure of environmental criteria of the Global Reporting Initiative (GRI) standard based on financial and non-financial information in 37 companies in 19 sub-sectors of the Colombian economy that were assessed by MERCO (Business Monitor of Corporate Reputation) in 2017 and 2018 in terms of corporate reputation, responsibility, and corporate governance. It is based on the theories of agency, stakeholders, and legitimacy, whereby six hypotheses were postulated. The indicators of environmental criteria were retrieved from the website and sustainability reports of each company, using a dichotomous approach for collecting information on environmental activities. The hypotheses were contrasted with a binary choice and panel data models. The results showed that increasing quality and transparency in voluntarily disclosed information decreases its asymmetry, thereby meeting the information needs of stakeholders, providing confidence, and strengthening corporate social responsibility (CSR) activities. In addition, the most indebted and largest companies disclose less information on environmental activities, in contrast to companies with higher solvency. Overall, the study contributed with the calculation of an asymmetry ratio with the MERCO indicators and the use of the insolvency risk variable as an explanatory variable for disclosure. Additionally, it contributed to the field of study of CSR from the Latin American context.

Analyzing The Effect Of Bank Characteristic On Profitability In Banking Companies Listed In Indonesia Stock Exchange

This research is conducted to analyze the effect of bank characteristics on go public banks’ profitability in Indonesia. Return on asset, return on equity, and net interest margin are dependent variables in this research and involves five types of banking risks (credit, liquidity, security, capital, and insolvency), bank size and diversification, and cost efficiency. Research objects of this research are banking companies listed on Indonesian Stock Exchange (IDX). The research data is financial data issued by IDX from 2014 to 2018. Observation data collected in this research is processed using the regression panel method. The result from this research is that credit risk and insolvency risk has effect on return on asset and return on equity significantly. Liquidity risk, capital risk and bank size don’t have significant effect. Security risk and bank diversification effecting net interst margin significantly. Cost efficiency has effect on profitability significantly.

Market reactions to enterprise risk management adoption, incorporation by rating agencies, and ORSA Act passage

AbstractPrior literature on Enterprise Risk Management's (ERM) value implications focuses on cost–benefit analyses of implementing an ERM program. We take a novel approach by examining the implementation dynamics and study whether the timing of firms' adoption affects ERM's value implication. We find that firms experienced positive (negative) abnormal returns when adopting ERM following (before) 2005 when Standard & Poor's (S&P) issued their ERM‐related rating criteria. We also find evidence that ERM firms experienced positive abnormal market reactions to this rating criteria change by S&P but find no evidence for the following change by A.M. Best. In addition, our study documents that the market rewarded ERM adopters and penalized nonadopters after November 2011 on key dates leading to the passage of the Own Risk Solvency Assessment (ORSA) Act when there was less uncertainty regarding ultimate passage of the Act. Overall, our results imply that the capital market's view on ERM is shaped by rating agency and regulatory changes. Our findings are also consistent with the view that investors gain a greater understanding of ERM over time.

Volatility in the Raw Materials Market and Risk Mitigation Methods

Companies in the raw materials market operate in a volatile and unstable market. Business downturns exert a particular effecton the level of cash flows and generate insolvency risk among companies, all the more so when crises are driven by objective circumstancesbeyond human control. Being well-versed with these risks, a company should take steps to mitigate the risk of rawmaterials price volatility affecting the planned results in at least the medium term. The subject of this analysis is to point out theinterdependencies between the basic economic categories when it comes to how the steel market functions and the risks stemmingfrom the volatility of the raw materials market. Moreover, it portrays the main financial instruments that can be used to mitigatethe consequences of the risk of movement of raw materials prices.

Examination of Interest-Growth Differentials and the Risk of Sovereign Insolvency

The objective of this research was to demonstrate the (nonlinear) risks of sovereign insolvency and explore the applicability of stochastic modeling in public debt management, given a structural economic model of stochastic government debt dynamics. A stochastic optimal control model was developed to model public debt dynamics based on the debt accounting identity, where the interest-growth differential obeys a continuous random process. This stochasticity represents both the interest rate risk of public debt and the variability of the growth rate of the nominal Gross Domestic Product combined. The optimal fiscal policy was analyzed in terms of the model parameters. The model was simulated, and results were visualized. The insolvency risk was demonstrated by examining the variance of the optimal process. The model was amended with hidden credit risk premia and fiscal multipliers, which forces the debt dynamics to be nonlinear in the debt ratio. The results, on the other hand, confirm that the volatility of the interest-growth differential is crucial in terms of sovereign solvency and in addition, it demonstrates the large risks stemming from the multiplier effect, which underlines the need for prudent debt management and fiscal policy.

Insolvency Prospects Among Small-and-Medium-Sized Enterprises in Advanced Economies

The COVID-19 pandemic has increased insolvency risks, especially among small and medium enterprises (SMEs), which are vastly overrepresented in hard-hit sectors. Without government intervention, even firms that are viable a priori could end up being liquidated—particularly in sectors characterized by labor-intensive technologies, threatening both macroeconomic and social stability. This staff discussion note assesses the impact of the pandemic on SME insolvency risks and policy options to address them. It quantifies the impact of weaker aggregate demand, changes in sectoral consumption patterns, and lockdowns on firm balance sheets and estimates the impact of a range of policy options, for a large sample of SMEs in (mostly) advanced economies.

Insolvency Risk of European SMEs during Pandemic

Covid-19 pandemic poses an existential threat to European SMEs' financial resilience with significant consequences for the European economy. Using a unique firm‐level survey data on SME financing conditions and a new measurement approach, this paper focuses on the insolvency risk of European SMEs and their access to finance around pandemic. We show that SME insolvency risk increased, on average, by around 21% during the pandemic. Finding customers and the cost of production and labor have contributed notably to SME insolvency risk around this period. Heightened insolvency risk results in deterioration in expected access to finance in general. During the pandemic, though, no particular worsening is observed in access to bank lending. Overall, our results have important policy implications for designing suitable policy measures to mitigate SME liquidity shortages and avoid unnecessary insolvencies during and in the aftermath of the pandemic.