Solvency Crisis Research Articles

Systemic bank runs without aggregate risk: How a misallocation of liquidity may trigger a solvency crisis

We develop a general equilibrium model of self-fulfilling bank runs. The key novelty is the way in which the banking system’s assets and liabilities are connected. Banks issue loans to entrepreneurs who sell goods to households, which in turn pay for the goods by redeeming bank deposits. The return on bank assets is thus contingent on households being able to withdraw their deposits. In a run, not all households that wish to consume manage to withdraw, since part of banks’ cash reserves end up in the hands of households without consumption needs. This misallocation of liquidity lowers revenues of entrepreneurs and bank asset returns, thereby rationalising the run. Interventions that restrict redemptions in a run can be self-defeating due to their negative effect on demand in goods markets. We show how runs can sometimes be prevented with combinations of deposit freezes and redemption penalties as well as with the provision of emergency liquidity.

Economic analysis and control of crisis phenomena in the activities of enterprises

The article analyzes the essence of crisis phenomena and the causes of their occurrence in the activity of the enterprise. In the activity of anyone enterprise there are quite a few reasons that can lead to a crisis situation, in the scientific literature there are external and internal factors that can cause a crisis situation that have a mutual impact. The emergence of crisis situations in the enterprise is an inevitable stage in the life cycle. In order to avoid excessively negative consequences of the crisis, the company needs to carry out early diagnosis of the possibility of crisis situations and, if necessary, to introduce a set of measures aimed at preventing or countering the crisis. In order to early detection of a crisis situation or the probability of its occurrence, it is necessary to systematically diagnose the financial security of the enterprise, which involves the implementation of express diagnostics, complex analysis and fundamental diagnostics. The article provides an indicative list of indicators for the implementation of express diagnostics of the financial and economic state of the enterprise, including: indicators of own sources of formation of financial resources and financial stability; indicators of liquidity and payment and settlement discipline; indicators of the state of fixed assets; performance indicators of economic activity and management of the enterprise. The list of these indicators is not exhaustive, because in each case the specifics of the industry, the market and the enterprise itself should be taken into account. Three main stages of the crisis development at the enterprise are considered: hidden crisis (efficiency crisis, strategy crisis), solvency crisis (performance crisis), threat of bankruptcy (liquidity crisis). The main manifestations of crisis situations at the enterprise at each stage and the main mistakes that management makes in an attempt to counteract the crisis are determined. The main tools for the development and application of anti-crisis measures have been identified. At any stage of the crisis, subject to the introduction of an effective marketing strategy, effective tools of crisis management and the sufficiency of financial resources, it is possible to restore the normal rhythm of the enterprise and strengthen market positions. The experience of well-known companies that have received a useful effect from the crisis situation is considered. The effectiveness of the anti-crisis management system at the enterprise is achieved subject to the flexibility and adaptability of the management mechanism, the ability to diversify and rapid situational response, the ability to effectively use the potential of the enterprise and the introduction of informal management methods. The article considers tendencies of development of Ukrainian enterprises in conditions of crisis caused by the war. In the context of economic sectors, the main obstacles in the development of enterprises are outlined. The analysis of dynamics of development of the existing business and the beginning of a new one (by sectors of the economy and by regions) is carried out.

Bank capital, earnings smoothing and provisioning practices in Nigeria: IFRS and risk evidence

PurposeThis study empirically tests the use of loan loss provisions (LLPs) for earnings and capital smoothing when emphasis is laid on banks' riskiness and adoption of the International Financial Reporting Standards (IFRSs) in Nigeria.Design/methodology/approachAnnual bank-level data are hand-extracted between 2007 and 2017 from annual reports of a sample 16 deposit money banks (DMBs), and analysed using appropriate panel regression models subsequent to a number of diagnostic tests including heteroscedasticity, autocorrelation and cross-sectional dependence. The use of both reported LLPs (TLLP) and discretionary LLPs (DLLP) for earnings and capital management is tested to advance the practice in the literature.FindingsGenerally, the study finds that Nigerian DMBs manage capital via LLPs, while mixed results are obtained for earnings smoothing. However, during IFRS, Nigerian DMBs' management of capital is identifiable with TLLP, while smoothing of earnings is peculiar to DLLP. Additionally, evidence of the improvement in loan loss reporting quality expected during IFRS for riskier Nigerian DMBs, could not be attained. This is corroborated by the study's findings of the use of both TLLP and DLLP for earnings and capital management during IFRS by DMBs in solvency crisis against the only use of TLLP to manage capital found for the entire period.Practical implicationsThe evidential capital and earnings lopsidedness may subject Nigerian DMBs' going-concern to a lot of questions.Originality/valueThe study sets a foremost record in the empirical test of managerial opportunistic behaviour embedded in earnings and capital concurrently while accounting for loan losses by all categories of Nigerian DMBs in terms of riskiness, following accounting regime change.

Corporate Restructuring Laws Under Stress: Policy-Making in Uncertain Times

The economic crisis triggered by the coronavirus pandemic is the most significant global crisis of its kind outside of wartime and the full impacts are still largely unknown. The path to economic recovery is impaired by the war on Ukraine. Many countries have either entered or are about to enter an economic recession. Now that many government support measures have expired or have been exhausted, it is unlikely that they will return at the same level. Many businesses are facing both a liquidity and a solvency crisis. This article considers the impact of these times of crisis and uncertainty on insolvency law-making across over 30 economies where the European Bank for Reconstruction and Development invests. It reflects on arguments raised by Menezes and Lawless in this volume and argues that national legislators should look to insolvency reforms (including in relation to digitalisation) to help their economies recover from recession and the economic shocks of the pandemic and the war on Ukraine, and work to improve the availability of insolvency data. Many international commentators have analysed the global crisis insolvency response from a developed economy perspective. This article focuses on the position in emerging economies, finding that, for a variety of reasons, insolvency was not at the forefront of the national emergency response for many emerging economies during the pandemic. It highlights some of the main deficiencies in insolvency frameworks and makes some suggestions for future policy-making for countries that want to strengthen the overall resilience of their insolvency systems, and financial restructuring processes in particular, to navigate future crises.

Tax Austerity: Does It Avert Solvency Crises?

AbstractMany high‐debt countries are adopting tax austerity, whereby governments raise the tax rate as their debt levels rise with the hope to dispel future solvency crises. This paper investigates the impact of tax austerity on government debt solvency. A solvency crisis occurs once adverse shocks push the debt above its effective debt limit, the maximum level of debt that the government can repay. I show that the position of the effective debt limit depends on tax austerity. I find that high‐debt countries like Italy that undergo tax austerity could lower their effective debt limit and induce a solvency crisis.

ЕФЕКТИВНЕ УПРАВЛІННЯ ПІДПРИЄМСТВОМ В УМОВАХ КРИЗОВИХ СТАНІВ ТА РИЗИКІВ

The results of the study established and justified the difference between the concepts of efficiency and effectiveness. The author proposed to consider the concept of efficiency from the point of view of the applied methodological tools of management, in the process of which there is an increase in the obtained result in relation to the spent means, in contrast to the effectiveness, which only proves the numerical expression of the achievement of the company's goals. In contrast to effectiveness, efficiency is a broader concept and can be described using both qualitative and quantitative indicators. Since the management of the enterprise takes place under conditions of uncertainty, the degree of riskiness of the decisions made depends on them, and therefore risk management is primary in ensuring the effectiveness of the management of the enterprise, because depending on how effective this management will be, the probability of a crisis situation will be lower. Risk management is implemented through the choice of directions and methods of its regulation, which correspond to each individual situation, or through a series of decisions regarding its acceptance or avoidance. The article proves that critical and catastrophic risk zones lead to the development of crisis phenomena at the enterprise - from a solvency crisis to a debt settlement crisis, which inevitably leads to its insolvency and bankruptcy. The effectiveness of anti-crisis management at each of the stages of the development of a crisis phenomenon at the enterprise can include: pre-crisis management, which consists in early detection and prevention of the crisis phenomenon; management in a period of crisis, the main goal of which is to stabilize the unstable state of the enterprise, maintain its balance and manageability; management of the enterprise at the stage of exiting the crisis, aimed at reducing costs and other losses associated with the crisis period. In turn, the effectiveness of enterprise management in different periods of crisis situations depends on developed strategies, adopted policies, agreed programs, successful and timely application of diagnostic tools, cooperation with creditors, investors, sanatoriums, etc.

Banking regulation in the United States after the world economic crisis of 2007/2008: economic immunity or false hopes

Based on the Post-Keynesian approach, we argue that commercial banks, through the financial reforms of 1980 and 1999, which made financial institutions more flexible, increased their capacity to operate in the capital market by becoming Banking Financial Holding Companies. The 2007/2008 crisis is understood as a consequence of financial deregulation and financial innovation process that weakened the Federal Reserve's capacity to restrain banking activity. Initially, we discuss the new institutional context that emerged from these changes in the financial regulatory framework between 1980 and 1999. Then, we focus on how financial deregulation allowed banking business to advance in financial markets, how this process contributed to the economic crisis of 2007, characterized both as a liquidity crisis and a solvency crisis, safeguarded by the National States. Finally, we analyze the Dodd-Frank Law (2010), which is interpreted as the reaffirmation of this endogenous process of financial domination.

COVID-19, Macroeconomic and Sustainability Shocks, Moral Hazard and Resolution of Systemic Banking Crises: Designing Appropriate Systems of Public Support

Banks have so far weathered well the financial turbulence caused by COVID-19 while at the same time being central in the economic and financial response. As the crisis moves from its initial phase as a short-term liquidity shock, the financial sector is facing increasing volumes of non-performing loans, raising the spectre of a banking solvency crisis. In economies already burdened with low-quality assets, the COVID-19 fallout is intensifying existing problems with legacy loans heightening the risk of a banking crisis. These issues are now being worsened by the impact of inflation and the invasion of Ukraine. Thus, addressing increasing volumes of bad loans, while supporting the proper functioning of the financial system, is a major challenge with systemic repercussions for a range of economies. This paper identifies a great paradox: since the bank rescues of the 2008–9 Global Financial Crisis there has been a disproportionate focus on the liability side of bank balance sheets through resolution measures such as bail-in and the accumulation of bail-inable debt. Post-crisis bank resolution regimes have overlooked solutions lying within the asset side of bank balance sheets. This paper analyses historical evidence to argue that concentrating on a liability-focused approach to the exclusion of asset-side solutions is ill-conceived. An excessive accumulation of non-performing loans on the asset side of bank balance sheets inevitably renders resolution interventions on the liability/equity side ineffective or at the very least insufficient to maintain banking system viability and financial stability. Bank asset restructuring involving the use of asset management companies, asset protection schemes and even capital injections can play a critical role in achieving an expeditious restoration of banking systems’ health following a major macroeconomic, sustainability or financial crisis.

Systemic bank runs without aggregate risk: how a misallocation of liquidity may trigger a solvency crisis

Systemic bank runs without aggregate risk: how a misallocation of liquidity may trigger a solvency crisis

Systemic Bank Runs without Aggregate Risk: How a Misallocation of Liquidity May Trigger a Solvency Crisis

Systemic Bank Runs without Aggregate Risk: How a Misallocation of Liquidity May Trigger a Solvency Crisis

What Did Central Banks Learn from Financial Crises?

Abstract During the global financial crisis (GFC) of 2007–2009 and the currentCovid-19 debacle, central banks acted quickly, boldly, and effectively. The paper argues that they did so thanks to the lessons learned from the past financial crises, which provided them with opportunities to reconsider their previous beliefs. A case in point is the banking crisis in the United States during the Great Depression of the 1930s that taught central banks to act rapidly and decisively in order to prevent an initial liquidity crisis from escalating into a solvency crisis leading to bankruptcies of banks with potentially disastrous consequences for the entire economy. The paper revisits the consequences of the currency crises of the 1990s, which transformed exchange rate regimes across the world: the EMS one of 1992–1993 that accelerated the launch of the euro, and the Asian one of 1997–1998 resulted in the proliferation of floating exchange rates in emerging economies.

INTERNATIONAL STANDARDS FOR BANK CAPITAL REGULATION

Abstract. The paper analyzes the evolution of the introduction of international standards for bank capital regulation. The aim of the research is to study international standards for bank capital regulation and their impact on financial stability and sustainability of domestic banking systems. The 2007—2009 Global Financial Crisis was perhaps the greatest banking and financial crisis since bank failures and the financial panic of the Great Depression in early 1930s. According to academics and professionals, there has been much debate over the last decade as to whether the 2007—2009 banking crisis was primarily a solvency crisis or a liquidity crisis. Capital adequacy of banks today is the main indicator of increasing society’s confidence in banking systems. The flexible and balanced implementation of Basel Committee on Banking Supervision (BCBS) recommendations on the assessment of bank capital adequacy is of particular importance in the context of the deepening economic crisis caused by COVID-19 quarantine restrictions. Regulation of bank capital is primarily settles by the ability to execute basic functions inherent in it. A number of shocks in connection with the crisis require the renewal and search for a new paradigm of regulation, which today is focused on achieving financial stability, overcoming pro-cyclicality, especially in the banking sector. One of the latest developments in the field of bank capital regulation has been the implementation of international banking supervision standards recommended by BCBS, which have been transformed from Basel I, Basel II, Basel III, Basel 3.5 to Basel IV. The new ideology suggests that in times of financial and economic crisis or in anticipation of growing uncertainty in the economy, it is necessary to abandon the idea of bank capital management and the creation of financial reserves to maintain liquidity and stability of financial institutions. These measures will not be able to protect the bank from default and bankruptcy. This ideology has become a new paradigm of effective banking regulation, which can be formulated as an accepted set of three vectors: risk; risk management; risk-oriented supervision. Keywords: bank capital, international standards, financial stability, liquidity, banking crisis, banking regulation. JEL Classification E44, F30, G15, G21 Formulas: 1; fig.: 4; tabl.: 3; bibl.: 22.

Ekosistem MSP i podrška finasiranja banaka u Srbiji

There is increasing awareness that the current liquidity crisis could lead to a solvency crisis, as many SMEs compensate declining revenues by taking on more debt, often with government support. In 2020 the level of insolvencies and bankruptcies were kept in check, the number of bankruptcies is expected to spike in 2021. This raises the question of efficiency of ecosystem, about policy approaches to support SMEs in need of finance, while not overburdening them with debt, what motivated the authors of the paper to research the banking loans as the access to external sources of finance within the SMEs ecosystem support. Also is analyzed the quality of the sub-dimensions, the legal and regulatory framework, collateralization options, credit information systems and the financial literacy. Descriptive statistical methods, as well as field and desk research, were used in the elaboration of the results. Key results confirmed that SMEs create more lucrative returns to the whole national economy in the improved access to finance if provided with better service models enabled by technology and new propositions as clients - the hypothesis of the research.

Effectiveness of management in public administration in complex and crises situations

The solvency crisis of 2020, exacerbated by the Covid-19 pandemic, necessitates a study of the effectiveness and relationship of crisis management in public administration. This study is based on the concepts of neo-institutionalism, attribution and organized legitimacy. The article confirms the importance of using the principles of these theories based on statistical analysis using the Granger test and a regression model based on panel data from transition economies. First of all we will review The Worldwide Governance Indicators (WGI) of transition economies for 1996-2018 and explore the relationship between public governance indicators and the effectiveness of crisis management.

COVID-19 Pandemic Recession and Recovery.

This review draws pragmatic lessons for developing countries to address COVID-19-induced recessions and to sustain a developmental recovery. These recessions are unique, caused initially by supply disruptions, largely due to government-imposed ‘stay-in-shelter lockdowns’. These have interacted with falling incomes and demand, declining exports (and imports), collapsing commodity prices, shrinking travel and tourism, decreasing remittances and foreign exchange shortages. Highlighting implications for employment, wellbeing and development, it argues that governments need to design comprehensive relief measures and recovery policies to address short-term problems. These should prevent cash-flow predicaments from becoming full-blown solvency crises. Instead of returning to the status quo ante, developing countries’ capacities and capabilities need to be enhanced to address long-term sustainable development challenges. Multilateral financial institutions should intermediate with financial sources at low cost to supplement the International Monetary Fund’s Special Drawing Rights to lower borrowing costs for relief and recovery.

Financial Stability, Resolution of Systemic Banking Crises and COVID-19: Toward an Appropriate Role for Public Support and Bailouts

A wide range of approaches has been applied to address banking and other financial crises. The nature of the approach depends on the nature of the crisis, its origins, evolution and context. Systemic banking crises are among the most common and costly to address. The experiences of the three major international financial crises of the past 25 years – the Asian Financial Crisis, the Global Financial Crisis, and the European Debt Crisis – offer critical lessons regarding the most effective approaches in tackling bank solvency during a systemic crisis. One of the most common and also effective methods has been the transfer of non-performing loans (NPLs) to an Asset Management Company (AMC) that performs workouts or liquidates stressed loan portfolios at a more opportune time to amortize losses. In most cases the use of AMCs has delivered positive results for the taxpayer. Contemporary consensus as regards tackling bank solvency during a systemic financial crisis focuses heavily on prevention of government bailouts in order to protect state finances and curb moral hazard. However, an overly dogmatic focus on preventing public financial support in the context of a systemic bank solvency crisis may place insurmountable obstacles to the use of state-backed AMCs and other forms of resolution of NPLs and bank recapitalization. This paper provides a new perspective on the common belief that public support in the context of systemic bank insolvency – i.e. bank bailouts – is an inefficient use of public funds or conducive to moral hazard. Our study finds that state-backed AMCs can be effective in recapitalizing banking systems, depending on the modus operandi of the restructuring, funding and the conditions attached to the fiscal backstop. With respect to systemic banking crises or those caused by exogenous factors, such as the unprecedented disruption of economic activity due the COVID-19 pandemic, preservation of financial stability and not containment of moral hazard should be policy-makers’ predominant goal. Thus, we suggest that a combination of balance sheet restructuring and the use of AMCs to manage NPLs is the optimal approach.

BANKRUPTCY OF THE ENTERPRISE: APPROACHES, PROCEDURES, ASSESSMENT OF PROSPECTS AND PRIORITIES OF MANAGEMENT IN THE CONDITIONS OF SOLVENCY CRISIS

Purpose. The aim of the article is defining approaches to the essence of the concept of “bankruptcy”, disclosing the content of the bankruptcy procedure and assessing the prospects and priorities of enterprises in the face of potential threats to their activities. Methodology of research. The following methods are used to achieve this goal: analysis and synthesis ‒ to study scientific research, normative and legal regulations to understand the essence of the concept of “bankruptcy”; statistical analysis ‒ to identify trends that confirm the hypothesis of an increase in the number of bankruptcies in a crisis, based on the indicators of profitability / loss of enterprises of Ukraine for 2016-2020; tabular – for a visual presentation of the analysed statistics. Findings. The concept of “bankruptcy” based on the analysis of the interpretation in the scientific literature revealed two approaches to understanding its essence: classical and market. It is determined that the main preconditions of bankruptcy are: legal grounds and impossibility of settlements, reorganization and conclusion of amicable agreements. It is established that the Bankruptcy Procedure Code of Ukraine defines improved procedures for declaring a debtor bankrupt. It is proved that during the crisis the number of unprofitable enterprises increases, which increases the risks of bankruptcy and confirms the market approach to understanding the essence of bankruptcy. Priorities and prospects of functioning of Ukrainian enterprises in the medium term are revealed. Originality. The study of the essence of the concept of “bankruptcy” and approaches to its interpretation was further developed, which allowed to establish the prevalence of a market approach to its understanding in modern conditions - as a natural mechanism of market economy selection of efficient enterprises in a crisis. It is established that the problem of ensuring income stability will be the main one in the management of Ukrainian companies in the medium term, and the growth of bankruptcies will be typical for the Ukrainian business environment in the next 2-3 years. Therefore, the priorities of the real sector are to reduce the number of insolvent customers and revise agreements to optimize receivables. Practical value. The results of this study may be the basis for further research on the prospects and priorities for overcoming the negative effects of the crisis in the context of combating bankruptcy. Key words: bankruptcy in crisis conditions, solvency crisis, market approach, classical approach.

EXTERNAL DEBT IMPLICATIONS ON THE DEVELOPMENT OF NATIONAL ECONOMY

The external debt of the Republic of Moldova is increasing constantly. Excessive external debt has been a big problem for both developing and developed countries during the years. Developing countries face this problem more often as they need to borrow to finance their objectives and strengthen the economic growth. It is very important for our country to determine the optimal level of indebtedness that the economy can bear. That is why the external debt should be contracted in strict accordance with the needs of the economy, and borrowed loans should consider the country’s reimbursement capacities to avoid the liquidity or solvency crisis. The scope of this paper is to give a prompt and correct overview of the importance of external debt management and its impact on the economic growth of the country. In the research process, the deduction, based on general theoretical information on the structure, management, external debt and indebtedness assessment, the economic influence policies were used and then passed on to practical analysis using specific indicators.

Risks, Resilience, and Reforms: Indonesia’s Financial System in 2019

Indonesia has managed the complex challenges of the global economy well. The country's capital outflows were smaller in 2018 than during the Taper Tantrum in 2013; the rupiah had regained most of its lost ground by January 2019; the Indonesian stock market has outperformed its peers; growth is forecast to remain stable; inflation is low; unemployment remains below its five-year average; consumer and business confidence are robust; and the government budget has improved through a smaller deficit and cheaper borrowing costs. But significant risks remain. This paper assesses these risks and evaluates the adequacy of Indonesia's crisis management framework. It finds that the framework has serious deficiencies that could see liquidity challenges become systemic solvency crises. The framework effectively removes Bank Indonesia as the lender of last resort, risks politicising the process of crisis response, and could mean slower, less effective responses to crises. This paper explores how the framework could be improved and what reforms could be undertaken to deepen Indonesia's financial system, strengthen financial resilience, and boost the long-term growth outlook.

Enfrentando a crise financeira: como constrangimentos jurídicos causaram a fragmentação institucional do poder monetário brasileiro no pós-2008

Resumo O prestamista de última instância é o agente financeiro, que tem a capacidade econômica e está disposto a emprestar liquidez, no momento em que outros agentes se recusam a fazê-lo. Autoridades de resolução estão legalmente habilitadas a empregar ferramentas técnicas para conter crises de solvência. Diferentemente de países desenvolvidos, em que bancos centrais criaram diversas modalidades de operações de liquidez emergencial e, ocasionalmente, desempenharam o papel de autoridades de resolução bancária, o Banco Central do Brasil (BCB) foi legalmente impedido de aumentar suas ações devido à Lei de Responsabilidade Fiscal. Este artigo argumenta que, devido a constrangimentos legais, a gestão da crise causou a fragmentação institucional do poder monetário no Brasil: as funções do BCB e também do Fundo Garantidor de Créditos (FGC) precisaram ser reestruturadas. Define-se poder monetário como a capacidade econômica, combinada ou não com a competência legal, para influenciar a criação de moeda-crédito na economia. Um modelo analítico é proposto para identificar a extensão do rearranjo institucional no pós-2008 e seus limites inerentes. É possível identificar problemas significativos de eficiência econômica e de legitimidade. A estrutura legal, criada principalmente por regras ad hoc do Poder Executivo, parece ser ainda incapaz de responder efetivamente a crises financeiras mais profundas.