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Article
Publication date: 3 February 2020

Zhenjie Wang, Zhuquan Wang and Xinhui Su

The authors point out that the existing research confuses the operational liabilities formed based on the “transaction” relationship with the financial liabilities formed based on…

Abstract

Purpose

The authors point out that the existing research confuses the operational liabilities formed based on the “transaction” relationship with the financial liabilities formed based on the “investment” relationship, which not only exaggerates the value of leverage but also underestimates the level of protection that companies provide for creditors alone. That is, the confusion of concepts not only triggers the problem of leverage misestimate but also triggers the short-term financial risk misestimate. The performance of “nominal leverage” and “nominal short-term solvency” based on total assets calculation cannot reflect the real leverage level and the real short-term financial risk of enterprises.

Design/methodology/approach

To distinguish the concepts of “assets” and “capital” and rationalize the relationship between “transactions” and “investments”, authors systematically design the “real leverage” indicators and “real short-term solvency” indicators, and measure the degree of misestimate of leverage and short-term financial risk indicators by traditional research. On this basis, this paper describes and analyses the trends of leveraged misestimate and short-term financial risk misestimate of listed companies in China and analyses which companies have more serious leverage misestimate. And it helps readers to form an objective understanding of the leveraged misestimate and short-term financial risk misestimate of listed companies in China.

Findings

Firstly, the overall high level of leverage of listed companies in China in the traditional sense is largely because of the misestimate of indicators. And this kind of misestimate is more serious among firms that have advantages in trading, such as state-owned enterprises and firms with higher market shares. Secondly, for most firms with normal solvency, traditional research systematically overestimated the negative impact of “nominal leverage” on financial risk indicators (represented by short-term solvency). The overestimation is significant in firms with serious leverage misestimate. Thirdly, indicators’ misestimate of the traditional research makes the banks cannot make effective credit decisions according to the firm's “real leverage” and “real short-term solvency”.

Originality/value

Firstly, clarify the differences between the concepts of “assets” and “capital”, and clarify the level of “real leverage” of listed companies in China, which is conducive to the process of “de-leveraging”. Secondly, revise the problem of misestimate of related indicators, so that financial institutions can clearly identify the true profitability and real risk level of the entity domain, and thus improve the effectiveness of credit decisions.

Details

Nankai Business Review International, vol. 11 no. 4
Type: Research Article
ISSN: 2040-8749

Keywords

Article
Publication date: 17 May 2013

Michael Martin

Interest rate risk, i.e. the risk of changes in the interest rate term structure, is of high relevance in insurers' risk management. Due to large capital investments in interest…

1588

Abstract

Purpose

Interest rate risk, i.e. the risk of changes in the interest rate term structure, is of high relevance in insurers' risk management. Due to large capital investments in interest rate sensitive assets such as bonds, interest rate risk plays a considerable role for deriving the solvency capital requirement (SCR) in the context of Solvency II. This paper seeks to address these issues.

Design/methodology/approach

In addition to the Solvency II standard model, the author applies the model of Gatzert and Martin for introducing a partial internal model for the market risk of bond exposures. After introducing calibration methods for short rate models, the author quantifies interest rate and credit risk for corporate and government bonds and demonstrates that the type of process can have a considerable impact despite comparable underlying input data.

Findings

The results show that, in general, the SCR for interest rate risk derived from the standard model of Solvency II tends to the SCR achieved by the short rate model from Vasicek, while the application of the Cox, Ingersoll, and Ross model leads to a lower SCR. For low‐rated bonds, the internal models approximate each other and, moreover, show a considerable underestimation of credit risk in the Solvency II model.

Originality/value

The aim of this paper is to assess model risk with focus on bonds in the market risk module of Solvency II regarding the underlying interest rate process and input parameters.

Details

The Journal of Risk Finance, vol. 14 no. 3
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 1 March 2017

John Topinka

The purpose of this research is to examine fiscal health of a specific local enterprise operation: seaports. Seaports provide unique local services while spending and borrowing…

Abstract

The purpose of this research is to examine fiscal health of a specific local enterprise operation: seaports. Seaports provide unique local services while spending and borrowing billions of dollars. Decision makers should be aware of the fiscal health of these enterprises in part to assess the potential risks to the fiscal health of the government at large or public authority. Using eight stock and flow fiscal indicators appropriate for enterprise activities, this research examines eight seaports to compare fiscal health by geographic location and governing structure as well as the connection between long-term and short-term fiscal measures. Descriptive measures suggest that western and public authority ports exhibit better fiscal health than southern and departmental ports with some evidence showing a modest link between long-term and short-term fiscal health.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 29 no. 1
Type: Research Article
ISSN: 1096-3367

Book part
Publication date: 14 November 2011

Rebecca Abraham and Charles W. Harrington

We propose a method for forecasting bank solvency that quantifies bank solvency as the probability that a bank will have more than 0.25 of the cash to total asset ratio. Predictor…

Abstract

We propose a method for forecasting bank solvency that quantifies bank solvency as the probability that a bank will have more than 0.25 of the cash to total asset ratio. Predictor variables include the ratio of loans secured by farmland to total loans, the ratio of loans to farmers to total loans, and the ratio of commercial and industrial loans to total loans. Loans secured by farmland to total loans significantly predicted the potential for insolvency. To a secondary extent, commercial and industrial loans significantly predicted bank failure. This result was validated with predicted probabilities significantly explaining cash to total assets.

Details

Advances in Business and Management Forecasting
Type: Book
ISBN: 978-0-85724-959-3

Article
Publication date: 14 November 2023

Mohamed Lachaab

The increased capital requirements and the implementation of new liquidity standards under Basel III sparked various concerns among researchers, academics and other stakeholders…

Abstract

Purpose

The increased capital requirements and the implementation of new liquidity standards under Basel III sparked various concerns among researchers, academics and other stakeholders. The question is whether Basel III regulation is ideal, that is, adequate to deal with a crisis, such as the 2007–2009 global financial crisis? The purpose of this paper is threefold: First, perform a stress testing exercise on the US banking sector, while examining liquidity and solvency risk indicators jointly under the Basel III regulatory framework. Second, allow the study to cover the post-crisis period, while referring to key Basel III regulatory requirements. And third, focus on the resilience of domestic systemically important banks (D-SIBs), which are supposed to support the US financial system in times of stress and therefore whose failure causes the entire financial system to fail.

Design/methodology/approach

The authors used a sample of the 24 largest US banks observed over the period Q1-2015 to Q1-2021 and a scenario-based vector autoregressive conditional forecasting approach.

Findings

The authors found that the model successfully produces accurate forecasts and simulates the responses of the solvency and liquidity indicators to different real and historical macroeconomic shocks. The authors also found that the US banking sector is resilient and can withstand both historical and hypothetical macroeconomic shocks because of its compliance with the Basel III capital and liquidity regulations, which consist of encouraging banks to hold high-quality liquid assets and stable funding resources and to strengthen their capital, which absorbs the losses incurred in a crisis.

Originality/value

The authors developed a framework for testing the resilience of the US banking sector under macroeconomic shocks, while examining liquidity and solvency risk indicators jointly under Basel III regulatory framework, a point not yet well studied elsewhere, and most studies on this subject are based on precrisis data. The authors also focused on the resilience of D-SIBs, whose failure causes the failure of the entire financial system, which previous studies have failed to examine.

Details

Journal of Economic Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0144-3585

Keywords

Article
Publication date: 27 February 2024

Julien Dhima and Catherine Bruneau

This study aims to demonstrate and measure the impact of liquidity shocks on a bank’s solvency, especially when the bank does not hold sufficient liquid assets.

Abstract

Purpose

This study aims to demonstrate and measure the impact of liquidity shocks on a bank’s solvency, especially when the bank does not hold sufficient liquid assets.

Design/methodology/approach

The proposed model is an extension of Merton’s (1974) model. It assesses the bank’s probability of default over one or two (short) periods relative to liquidity shocks. The shock scenarios are materialised by different net demands for the withdrawal of funds (NDWF) and may lead the bank to sell illiquid assets at a depreciated value. We consider the possibility of second-round effects at the beginning of the second period by introducing the probability of their occurrence. This probability depends on the proportion of illiquid assets put up for sale following the initial shock in different dependency scenarios.

Findings

We observe a positive relationship between the initial NDWF and the bank’s probability of default (particularly over the second period, which is conditional on the second-round effects). However, this relationship is not linear, and a significant proportion of liquid assets makes it possible to attenuate or even eliminate the effects of shock scenarios on bank solvency.

Practical implications

The proposed model enables banks to determine the necessary level of liquid assets, allowing them to resist (i.e. remain solvent) different liquidity shock scenarios for both periods (including eventual second-round effects) under the assumptions considered. Therefore, it can contribute to complementing or improving current internal liquidity adequacy assessment processes (ILAAPs).

Originality/value

The proposed microprudential approach consists of measuring the impact of liquidity risk on a bank’s solvency, complementing the current prudential framework in which these two topics are treated separately. It also complements the existing literature, in which the impact of liquidity risk on solvency risk has not been sufficiently studied. Finally, our model allows banks to manage liquidity using a solvency approach.

Article
Publication date: 5 May 2020

Jose Eduardo Gomez-Gonzalez, Ali Kutan, Jair N. Ojeda-Joya and Camila Ortiz

This paper tests the impact of the financial structure of banks on the bank lending channel of monetary policy transmission in Colombia.

Abstract

Purpose

This paper tests the impact of the financial structure of banks on the bank lending channel of monetary policy transmission in Colombia.

Design/methodology/approach

We use a monthly panel of 51 commercial banks for the period 1996:4–2014:8.

Findings

An increase in the monetary policy interest rate significantly reduces bank loan growth. The magnitude of this effect depends on banks’ financial structure. Additionally, we identify an asymmetric effect in which the bank lending channel is stronger in monetary contractions than during expansions. We show that this behavior is due to the heterogeneous response of banks with different levels of solvency. This finding has important implications for the design and implementation of monetary policy and coordination of central bank’s policy with key economic agents.

Practical implications

The fact that the BLC is stronger in times of monetary contraction is quite interesting for central banking, as it shows that monetary policy transmission is harder during macroeconomic downturns. When investment plans are depressed, monetary stimulus may prove insufficient to reactivate credit demand. This has proven to be true in advanced economies after a strong recession and our results suggest that is also true in emerging market economies for economic downturns in general. Central banks may have to provide stronger shocks to reactivate private credit when the economy is facing a slow economic recovery.

Originality/value

Our findings point out that an increase in the monetary policy interest rate significantly reduces bank loan growth. However, the magnitude of this effect critically depends on two aspects. First, bank heterogeneity matters. Particularly, the loan supply of better capitalized banks is less sensitive to monetary policy shocks. Second, the response of credit supply to shifts in short-term interest rates critically depends on the monetary policy stance. The BLC is stronger in times of monetary contraction than during expansions. Moreover, we show that this asymmetric behavior is due to the heterogeneous response of banks with different levels of solvency to the monetary policy stance.

Details

International Journal of Emerging Markets, vol. 16 no. 4
Type: Research Article
ISSN: 1746-8809

Keywords

Abstract

Details

The Corporate, Real Estate, Household, Government and Non-Bank Financial Sectors Under Financial Stability
Type: Book
ISBN: 978-1-78756-837-2

Article
Publication date: 1 May 2004

Fabiano Colombini and Simone Ceccarelli

This paper discusses dynamic financial approaches to solvency analysis in non‐life insurance companies by explaining cash flow simulation models which are based on the planning of…

1835

Abstract

This paper discusses dynamic financial approaches to solvency analysis in non‐life insurance companies by explaining cash flow simulation models which are based on the planning of their typical cash inflows and outflows. Posits that these models take into account patterns of loss reserve run‐offs and asset cash flows by implementing several hypotheses that also include expectations about external economic conditions such as inflation rates and interest rates. Acknowledges the cash inflows and outflows have been planned over a period of time to evaluate how positive net cash flow (liquidity) leads to the increase in assets over liabilities (solvency).

Details

Managerial Finance, vol. 30 no. 5
Type: Research Article
ISSN: 0307-4358

Keywords

Book part
Publication date: 14 July 2006

Jamie Morgan

The purpose of this paper is to explain how the current “crisis” in the UK pension system arose. I argue that it is a result of a combination of changes in government policy and…

Abstract

The purpose of this paper is to explain how the current “crisis” in the UK pension system arose. I argue that it is a result of a combination of changes in government policy and basic instabilities always inherent in the financial system. Policy changes increased the vulnerability of the pension system to those instabilities. The background to these changes and also the frame of reference in terms of which the “crisis” itself is now phrased is broadly neoliberal. Its theoretical roots are in ideas of the efficiency of free markets. Its policy roots are expressed in a series of similar neoliberal policy tendencies in other capitalist states. I further argue that neoliberal solutions to the pension crisis simply offer more of the very matters that created the problems in the first place. Moreover, the very terms of debate, based in markets, financialisation of saving and individualisation of risk, disguise a more basic debate about providing a living retirement income for all. This is a debate that New Labour is simply not prepared to constructively engage with in any concrete fashion.

Details

The Hidden History of 9-11-2001
Type: Book
ISBN: 978-1-84950-408-9

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