Solvency Problems Research Articles

Shipyard Bankruptcy Policy

The prevailing approach in mainstream economic theory is that the role of government should be reduced to ensuring an appropriate institutional framework and political stability for the proper functioning of the (free) market. Although the free market concept has proven (at least in theory) to be an unsurpassed mechanism for the effectiveness of economic decision-making and the reconciliation of production and consumption, there are still disputes about the degree of state intervention in the market, which are being re-actualized (in the post-transition and globalization process) when it comes to solving solvency problem(s) in the shipbuilding industry. Although various methodological approaches are available to study such a complex problematic framework, this paper analyzes the legal aspect, since the empirical debates (on some aspects) on the legal regulation of the maritime domain and insolvency proceedings (as well as the ambiguities that have arisen in the application of existing regulations) clearly show which areas and issues need to be urgently addressed and/or reformed.

Crisis y cambios estructurales en el sector bancario español: Una comparación con otros sistemas financieros

La grave crisis económica que acompañó a la crisis financiera inicial, cuyo origen se establece en el sector de la vivienda en Estados Unidos, y las posteriores tensiones en los mercados de deuda soberana europea, generaron importantes problemas de estabilidad y de solvencia en el sector bancario español. Este entorno de profunda inestabilidad económica y financiera constituye el punto de partida de este trabajo, que tiene como objetivo prioritario, en primer lugar, realizar un análisis de las reformas financieras adoptadas por las autoridades españolas desde finales de 2008, momento en el que se implementaron medidas a corto o medio plazo para hacer frente a las consecuencias más inmediatas de la crisis, hasta la finalización del programa de asistencia financiera; y, en segundo, comparar los resultados alcanzados con los correspondientes a otros sistemas bancarios que también han recibido apoyos públicos.

Are going‐concern issues disclosed in audit reports associated with subsequent bankruptcy? Evidence from the United States

The Public Company Accounting Oversight Board (PCAOB) has expressed interest in the following issues related to going‐concern modified audit opinions (GCOs): auditor's communication of factors that led to the GCO, the role of liquidity versus other factors in GCOs, and the subsequent failures of clients with GCOs. We use a sample of 2,921 first‐time GCOs spanning the years 1999 to 2015 in the United States and find that profitability factors are cited in 81% of GCOs while liquidity issues are cited in 56% of GCOs. Overall, 16.8% of the first‐time GCO clients entered bankruptcy within one year. After controlling for the probability of bankruptcy, client size, and auditor type, for clients of Big N auditors, the disclosure of profitability factors in the GCO is associated with a higher likelihood of subsequent bankruptcy; in contrast, for clients of non–Big N auditors, disclosures of liquidity and solvency problems are associated with a higher likelihood of subsequent bankruptcy. Our findings provide an empirical grounding for the debates surrounding GCOs and provide useful information for standard‐setters and financial statement users.

Insolvency law and debt on the Silk Road: a new frontier for cross-border insolvency?*

ABSTRACT China’s Belt and Road Initiative (BRI) is having a transformative effect on infrastructure development and international trade. This strategic development reflects China’s rapid emergence as a dominant player in the new international economic order and its competition with other major powers. It also reflects China’s championing of globalization. The BRI program will inevitably affect the emerging body of international commercial law operating in the over 125 countries and 29 international organizations that have signed up to be part of the BRI. Although there are many legal issues that have been raised by these developments, this article examines the emerging shape of cross-border insolvency law on the maritime and overland ‘Silk Roads’. Solvency problems are already emerging as serious concerns arising out of debts incurred through China’s infrastructure investments under this initiative. To-date, only 24 BRI countries have to varying degrees implemented the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency, creating a tension between territorial and more universalist approaches. In the short term, these insolvency issues are likely to be dealt with in a number of ways, such as by resorting to ‘soft law’ or by using administrative or political mechanisms. Given China’s commitment to the rule of law (with Chinese characteristics), it is inevitable that efforts will be made to give some normative shape to this new global space. This article seeks to explore this emerging frontier for cross-border insolvency law.

СУЧАСНИЙ СТАН ПІДПРИЄМНИЦЬКОЇ ДІЯЛЬНОСТІ В УКРАЇНІ

Carrying out business activities, enterprises ensure the development of the modern economy of the country, form the budget of different levels. Entrepreneurship itself forms an effective management system, is a requirement for achieving economic growth. The result of entrepreneurial activity is to make a profit. It is worth noting that experts provide contradictory assessments of the development of entrepreneurship in Ukraine. In the international ranking of ease of doing business Doing business-2020, Ukraine has taken 64th place, rising by 7 positions and improving 5 of the 10 key indicators. According to general statistics, there is a positive trend of growth of economic entities in recent years, but it does not provide growth in sales, this growth is accounted for by enterprises. It is self-employed entrepreneurs, who are the driving force of any country's economy, a means of overcoming the problems of low solvency and unemployment in the country. In the structure of economic entities in Ukraine by type of economic activity, the number of wholesale and retail trade enterprises and enterprises engaged in information and telecommunication activities is growing year after year, but the number of construction enterprises, transport enterprises, industrial enterprises, and agricultural enterprises is decreasing. The analysis of the cost structure by economic elements of Ukrainian enterprises showed that in general the largest share in the cost structure of business entities in Ukraine for the period from 2012 to 2019 is occupied by material costs. That is, the production of products (goods, services) is material-intensive and the country does not introduce innovative technologies. Due to the industrialization of the real sector of the economy, especially in manufacturing, the country has lost the complex types of production that provided the value chain. The result of such losses was the loss of entire sectors of complex exports and the stagnation of the real sector of the economy. As a result of provided research, it can be noted that there are certain problems in the country for the development of entrepreneurship, which is a special type of activity. The state should support small and medium-sized businesses in the country because entrepreneurship itself is a powerful "locomotive" that will make it possible to ensure proper growth of production and welfare. The prospect of further research should be the study of business engineering as a modern management technology that can significantly accelerate the reform of the domestic economy on a market basis.

Postponing Retirement and Social Security in a Two Sector Model

Pay-as-you-go (PAYG) social security schemes in the OECD countries are facing solvency problems, as people are living longer and birth rates have declined. Postponing the full retirement age (FRA), when retirees are entitled to full pension, has been proposed as a solution. This effectively lowers the payroll tax rate since pension is paid only in the post-FRA period. In a two-period two-sector overlapping generations model, I show that this shift lowers savings (because a part of the expected old age income is consumed in the first period), as employment increases. In the transition to the new steady state, capital is decumulated and the wage rate falls. Contrast this with a reduction of the payroll tax rate where the initial old suffer reduced consumption, but the young have higher post-tax income and this spurs capital accumulation.

Small and Medium Enterprises in the Russian Transaction Sector

Purpose: to study the significance of small and medium enterprises for the functioning of the modern Russian transaction sector.Methods: the paper used General scientific research methods: analysis and synthesis, abstraction, generalization. The study used a comparative method and elements of economic analysis. The article also uses a graphical method of presenting information. The study was carried out on the basis of official statistical data provided by the Federal State Statistics Service of Russia.Results: to achieve this goal, the article solves the following tasks: 1) A review analysis of the current state of the domestic transaction sector based on the study of statistical data on the activities of Russian enterprises and organizations. This formed the basis for further research. 2) Analyzed indicators of small and medium enterprises in the transaction types of economic activity. This made it possible to identify their role in the functioning of the transaction sector. 3) Studied the statistical indicators of the financial condition of small and medium organizations of the transaction sector, which showed the problems of their activities.Conclusions and Relevance: currently, the transaction sector is a significant part of the domestic economy. This is evidenced by a General analysis of the statistical characteristics of the activities of Russian enterprises and organizations. At the same time, the majority of enterprises engaged in transactional activities have a private form of ownership. The study of the activities of small and medium enterprises showed that today more than half of them work in the transaction areas. In this regard, small and medium businesses can be considered an integral and very important part of the modern transaction sector. The flagship of the transactional activity in the business environment is small businesses. Their indicators significantly exceed the corresponding values of medium organizations. In addition, the main role of small enterprises is due to the immanent properties of small-scale companies. Nevertheless, the analysis of indicators of the financial condition of small and medium enterprises of transaction activities revealed their weak business and commercial efficiency, the presence of problems of solvency and financial stability. This threatens not only the viability of enterprises, but also the efficient functioning of the transactional sector. In this regard, there is a need to develop and conduct systemic activities aimed at supporting the development of Russian small and medium enterprises, as well as stimulating the development of the entire domestic transaction sector, consistent with the general strategy of economic development of Russia.

Modelo predictivo de quiebra en empresas constructoras inscritas en el Minvu de Valparaíso”

La administración financiera es una de las funciones más importantes en la existencia de una entidad. Según Merton & Bodie (2003) esto ayuda a organizar la forma de asignar recursos, como también de un conjunto de modelos cuantitativos que ayuden en la evaluación de alternativas, toma de decisiones y la puesta en práctica de ellas. Hay empresas que no logran realizar esta función con efectividad, lo que provoca graves problemas de solvencia a corto y largo plazo; es por esto que Altman E. (2000) realiza un modelo con la finalidad de predecir quiebras, consiste en analizar razones financieras que permitan revelar la real situación de una entidad. El propósito de esta investigación es la comprobación de la efectividad del modelo predictivo de quiebra, esto mediante la contextualización de la vulnerabilidad de las empresas constructoras, siendo así entonces, la aplicación del modelo predictivo de quiebra, que permite a las empresas medir la probabilidad de fracaso y anticiparse a las consecuencias, asociándola al sector de la construcción, principalmente Registro nacional de Contratistas del MINVU de la Región de Valparaíso. Concluyendo que si bien este modelo ayuda a observar el estado de una empresa en el mercado, no es necesariamente la única forma de evaluar el riesgo

The Basel Capital Requirement, Lending Interest Rate, and Aggregate Economic Growth: An Empirical Study of Viet Nam

In recent years, the Vietnamese economy has shown signs of financial distress, and especially small banks have experienced serious liquidity and solvency problems. Based on the new policy of the State Bank of Vietnam, in order to ensure safe and effective banking operations, the Basel II accord will be widely applied to the whole banking system by 2018. This paper investigates the effects of the Basel II capital requirement implementation in Viet Nam on the bank lending rate and national output. The paper provides a theoretical framework as well as empirical model by developing a Vector Error Correction Model (VECM) over the period 2018 to 2016 by employing three groups of indicators (macroeconomics, banking, and monetary). The main finding of the paper is that at the bank level, a tightening of regulatory capital requirements does not induce a higher lending rate in the long run. Also, changes in micro-prudential capital requirements on banks have statistically significant spillovers on the GDP growth rate in the short term; yet, their effects significantly lessen over a longer period.

Contagion through common borrowers

We propose a model in which banks are exposed to the risk of contagion through their portfolio of loans. We show that a solvency problem in one bank can be transmitted to another if they lend to the same borrower. The novelty is that the channel for the transmission involves banks’ monitoring incentives. The intensity with which all banks monitor a common borrower is reduced when one of the banks suffers a solvency shock. The reduced effort intensity affects the borrower's probability of success and creates a contagion (endogenous correlation) from the balance-sheet of the affected bank to the balance-sheet of the other banks lending to the same borrower. Banks hit by a solvency shock have lower incentives to monitor borrowers because less is left after paying depositors. Banks not hit by a solvency shock face borrowers’ risks entirely on their own, which increases the expected cost of lending. As a consequence, they respond by reducing the monitoring intensity for the common borrower. Bank equity can mitigate the risk of contagion.

Corporate governance and procyclicality in a banking crisis: Empirical evidence and implications

This paper presents our analysis of a complete financial data set on the population of Spanish deposit institutions for the last credit cycle. This information is combined with details about the characteristics of the corporate governance of the banks. Our results show that in a context of rapid credit growth (2002–2007), only financial institutions managed with political criteria have eventually experienced serious solvency problems (2008–2017) and have finally had to be bailed out with public resources. These results are particularly relevant for the establishment of appropriate prudential policies in countries where a government-owned banking system still exists.

CEO Compensation at Financial Firms

We examine whether risk-taking among the largest financial firms in the U.S. is related to CEO equity incentives before the 2008 financial crisis. Using data on U.S. Federal Reserve emergency loans provided to these firms, we find that the amount of emergency loans and total days the loans are outstanding are increasing in pre-crisis CEO risk-taking incentives – “vega”. Our results are robust to accounting for endogeneity in CEO equity incentives and selection of financial firms into emergency loan programs. We also rule out the possibility that our results are driven by a financial firm’s funding base, its complexity, or CEO overconfidence. We conclude that equity incentives (vega) embedded in CEO compensation contracts were positively associated with risk-taking in financial firms which resulted in potential solvency problems. We also find some evidence, although somewhat weaker, that higher incentive alignment (“delta”) mitigated such problems in those financial firms.

Stochastic Assessments of Urban Employees’ Pension Plan of China

In the uncertain environment of population and economy; the pension plan for urban employees in China is under threat from various types of financial risk. This paper mainly builds a comprehensive risk assessment system to evaluate the solvency sustainability of the urban employees’ pension plan of China. Specifically, we forecast annual accumulative net asset; actuarial balance; and potential support ratio for the next seventy years. To account for the impact of demographic uncertainty on long-term finances, stochastic simulations are used to estimate the probability distribution of relative risk indicators. Moreover, we integrate the Lee–Carter model into the population projection. According to the median projection, the public pension fund will have a gap in about 35 years; and the cash flow will be negative about 25 years later. Furthermore, under the existing policy, the burden of insured employees will increase rapidly. Delayed retirement could relieve the coming solvency risk, but it does not fundamentally resolve the solvency problem in the long run.

Kríza likvidity a finančná nákaza v rokoch 20072009: ponaučenie do budúcnosti

The paper explains modern liquidity crisis and financial contagion from shadow banking system to money market in 2007-2009. Liquidity shock was massive due to high connectivity with the quality of underlying (securitized) assets. Thus, the problem of solvency was main driver of the liquidity crisis on the interbank market. Counterparty risk was transmitted to the money market through various channels: direct or indirect exposition to shadow banking, confidence channel, asset price channel and wholesale funding run. The structure of paper is following: first part analyzes financial market infrastructure of shadow banking, wholesale funding (originate-to-distribute) model and ABCP market; the second one describes financial market turmoil and contagion to the money market. Liquidity crisis strongly hit many segments of the money market: unsecured money market, repo market, FX swap market, Eurodollar market. Liquidity crisis was severe due to strong correlation between counterparty risk and liquidity premium as well between funding and market liquidity. Monitoring of the main causes of the liquidity crisis in his early stages is important for the fast reaction by central banks in terms of collateral quality and quantity of the reserve´s supply.

CEO compensation and risk-taking at financial firms: Evidence from U.S. federal loan assistance

We examine whether risk-taking among the largest financial firms in the U.S. is related to CEO equity incentives before the 2008 financial crisis. Using data on U.S. Federal Reserve emergency loans provided to these firms, we find that the amount of emergency loans and total days the loans are outstanding are increasing in pre-crisis CEO risk-taking incentives – “vega”. Our results are robust to accounting for endogeneity in CEO equity incentives and selection of financial firms into emergency loan programs. We also rule out the possibility that our results are driven by a bank's funding base, bank complexity, CEO overconfidence, or matching of CEOs to select banks. We conclude that equity incentives (vega) embedded in CEO compensation contracts were positively associated with risk-taking in financial firms which resulted in potential solvency problems. We also find some evidence, although somewhat weaker, that higher incentive alignment (“delta”) mitigated such problems in those financial firms.

When Credit Dries Up: Job Losses in the Great Recession

This paper studies whether the solvency problems of Spain’s weakest Banks during the Great Recession had real effects. Data from the official credit register of the Bank of Spain indicate that those banks curtailed lending well in advance of their bailout. We show the existence of a credit supply shock, controling for firm fixed effects, and assess its impact by comparing the change in employment between 2006 and 2010 at firms that were clients of weak banks to those at comparable non-client firms. Our estimates imply that around 24% of job losses at firms attached to weak banks in our sample are due to this exposure. This accounts for one-half of downsizing at attached surviving firms and one-fifth of losses due to exposed-firm exits.

Rediscovering Macro-Prudential Regulation: The National Banking Era from the Perspective of 2015

We review the bank regulatory and supervisory practices of the National Banking Era and argue that their primary focus was both micro- and macro-prudential. Regulatory limits on real estate lending and large required cash holdings focused on systemic risk issues and successfully limited serious banking system solvency problems. The careful scrutiny of banks’ assets and operations revealed in Examiner Reports, as well as disclosure requirements, and Examiners’ due diligence about the network of reserves held by National Banks, also ensured that depositors and stockholders had ready access to reliable information, which also helped to promote public confidence in systemic stability. We summarize the content of Examiner Reports, including information about the examination process, bank ownership, corporate governance, the composition and quality of loans, dividend payments, and different types of funding. We sample urban locations outside the East, permitting comparison of practices within similar environments across different regions.

The US$ 2.1 billion derivative loss that ruined the Brazilian Aracruz

This paper critically analyses the case of the Brazil-based Aracruz Celulose S.A., which was one of the world's largest producer of bleached eucalyptus pulp. In 2008, it posted a derivate loss of US$ 2.1 billion dollars, which is considered the 7th largest derivative loss for all time. For these, we use publicly available information about the case that includes: 1) financial statements; 2) notices of material events announced at the Securities Exchange Commission (SEC) and in the Comissao de Valores Mobiliarios (Brazilian Exchange Commission); 3) the administrative proceeding process conducted by Comissao de Valores Mobiliarios; 4) the company's website; 5) newspaper and website articles; 6) academic journals. Just before the crisis, Aracruz was a very successful company and its financial structure was solid. That loss caused a huge solvency problem that lead to end of the company. Aracruz went from being a history of success to a situation of financial insolvency. Our analysis evidences that Aracruz was operating as a 'bank', using derivatives to speculate against the US dollar and not really to hedge its revenues, as it was heavily leveraged. The results show the misuse of derivatives can damage a company and even lead to bankruptcy.

Усовершенствование законодательно-нормативного регулирования деятельности банков

The article studies the problems of banks solvency during the crisis. It examines the organizational model of control improvement in order to conduct an efficient and independent internal auditing. It also suggests the ways to improve legislative and statutory regulation of the bank activity on the basis of Basel standards.

DYNAMIC BALANCE SHEET MODEL WITH LIQUIDITY RISK

Theoretically optimal responses of banks to various liquidity and solvency shocks are modeled. The proposed framework is based on a risk-adjusted return portfolio choice in multiple periods subject to the default risk related either to liquidity or solvency problems. Performance of the model and sensitivity of optimal balance sheet structures to some key parameters of the model are illustrated in a specific calibrated setup. The results of the simulations shed light on the effectiveness of the liquidity and solvency regulation. The flexible implementation of the model and its semi-analytical solvability allows for various easy applications of the framework for the macro-prudential policy analysis.