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The objective of this paper is to provide a global perspective of the liquidity risk from a banking societies‘ viewpoint. Our paper belongs to the technical studies that analyze the concrete way in measuring the liquidity risk at the level of the banking societies from Romania. The study is structured on chapters that present the theoretical background in liquidity risk management and new trends in measuring, monitoring and controlling liquidity risk. Also, the paper contains a study cases part, which presents the actual stage and the challenges of the measuring the liquidity risk. We try to underline the importance of a flexible banking system, which should be able to measure and forecast its prospective cash flows for assets, liabilities, off-balance sheet commitments and derivatives over a variety of time horizons, under normal conditions and a range of stress scenarios, including scenarios of severe stress.

This paper describes Norges Bank’s micro stress-testing framework for assessing the Norwegian banking sector’s losses on loans to the nonfinancial enterprise sector. Using projected macro variables and a stock-flow approach, annual financial statements of every firm in Norway are projected five years ahead. The loan loss potential is then assessed using a creditscoring model. We present a backtest of projections, taking the history of macro variables as given. Our results are fairly good using a relatively simple setup, and we conclude that stockflow projections of financial statements can be useful for stress testing banks’ loan portfolios.

The current financial crisis seems to be more painful than those occurring in recent decades. This crisis caused a massive decline in the market confidence of both businesses and consumers. The crisis has affected a multitude of economic and financial activities such as financial markets that have registered genuine reductions, serious problems of liquidity and depreciation of national currencies. Worldwide banking systems are one of the major areas that were affected by the crisis, with considerable bankruptcies landslide. This study investigates the effects of financial crisis on the banking system from Romania while highlighting the challenges brought by the crisis.

Given the worldwide financial market confusion caused by the subprime mortgage problem and the increase in credit line contracts with relaxed covenants, there have been cases in which financial institutions are facing a demand to provide additional credit to securitized vehicles with heightened liquidity and credit risks. These are typical examples demonstrating the importance of risk management considering variations in exposure. There are also calls for incorporation of future variations in exposure into the model for the Basel II advanced internal ratings-based approach. This paper adopts commitment lines as a credit provision with variable exposure and constructs a credit risk model whereby stochastic new borrowing demand is linked to changes in a firm fs asset value. Through simulations, the paper then considers the interdependence among exposure at default, probability of default, loss given default, expected loss, and unexpected loss. The paper also prepares a simple model for the covenants, and verifies the influence of the rigidness of covenants on expected loss and other risk factors.

Au vu des comptes sur les dix dernières années, la crise intervient à l’issue d’une période de renforcement de la structure financière des entreprises en France.

This article presents an attempt to derive models for financial instability prediction in manufacturing and service industry especially suitable for transitional environments. Research results indicate that the most important ratios – independent variables that discriminate financially stable from unstable companies consist of liquidity, solvency and profitability ratios. Financial instability models have high degree of diagnostic and prognostic power what was statistically validated on the sample units. Aforementioned predictive ability makes these models appropriate tools for predicting the degree of financial stability of company’ s business partners as well as useful instrument in estimating the appropriateness of going concern assumption for company itself. Financial instability models can be used, not only as instrument for choosing adequate business partners, but also as a tool for estimating the level and trends of financial stability in manufacturing and service industry on macro level presenting in this way instrument for macro policy decision makers.

In the context of the current financial crisis, when more companies are facing bankruptcy or insolvency, the paper aims to find methods to identify distressed firms by using financial ratios. The study will focus on identifying a group of Romanian listed companies, for which financial data for the year 2008 were available. For each company a set of 14 financial indicators was calculated and then used in a principal component analysis, followed by a cluster analysis, a logit model, and a CHAID classification tree., Comment: ISSN: 1454-0320

When a firm is unable to roll over its debt, it may have to seek more expensive sources of financing or even liquidate its assets. This paper provides a normative analysis of minimizing such rollover risk, through the optimal dynamic choice of the maturity structure of debt. The objective of a firm with long-term assets is to maximize the effective maturity of its liabilities across several refinancing cycles, rather than to maximize the maturity of the current bonds outstanding. An advantage of short-term financing is that a firm, while in good financial health, can readjust its maturity structure more quickly in response to changes in its asset value.

We use a vector error-correction model to study interdependencies between the aggregate expected default frequency (EDF) and the macroeconomic development. The model is used to forecast the median EDF. Evaluations of the model show that it yields low forecast errors and that the interest rate has the strongest impact on expected default frequency. Forecasts indicate that a lower short-term interest rate reduces the EDF and, in turn, risk premiums. This reduces the marginal cost for corporate investments and household consumption and stimulates growth through these two components of aggregate demand. At the same time, it imposes a downward pressure on the product prices of firms and thereby on inflation.

In this paper we stress-test credit portfolios of twenty-eight German banks based on a Merton-type multifactor credit-risk model. The stress scenario is an economic downturn in the automobile sector. Although the percentage of loans in the automobile sector is relatively low for all banks in the sample, the expected loss conditional on the stress event increases substantially by 70–80 percent for the total portfolio. This result confirms the need to account for hidden sectoral concentration risk because the increase in expected loss is driven mainly by correlation effects with related industry sectors. Therefore, credit-risk dependencies between sectors have to be adequately captured even if the trigger event is confined to a single sector. Finally, we calculate the impact on banks’ own-funds ratios, which decrease on average from 12 percent to 11.4 percent due to the stress event, which indicates that banks overall remain well capitalized. These main results are robust against various robustness checks, namely those concerning the granularity of the credit portfolio, the level of intersector asset correlations, and a cross-sectional variation of intrasector asset correlations.

We present insolvency practitioners from 88 countries with an identical case of a hotel about to default on its debt, and ask them to describe in detail how debt enforcement against this hotel will proceed in their countries. We use the data on time, cost, and the likely disposition of the assets (preservation as a going concern versus piecemeal sale) to construct a measure of the efficiency of debt enforcement in each country. We identify several characteristics of debt enforcement procedures, such as the structure of appeals and availability of floating charge finance, that influence efficiency. Our measure of efficiency of debt enforcement is strongly correlated with per capita income and legal origin and predicts debt market development across countries. Interestingly, it is also highly correlated with measures of the quality of contract enforcement and public regulation obtained in other studies.

We present evidence on the efficiency of the resolution of financial distress in bankruptcy in The Netherlands. We employ a unique data set based on the files of the trustees and court offices, which includes the characteristics of the firms before and in the bankruptcy procedures, the details of the bankruptcy process and the outcomes. This data allows us to measure the costs and recovery rates in the Dutch liquidation-based bankruptcy system, and to investigate the determinants of these costs and recoveries. We find that direct costs are on average 16%. The costs are lower in larger firms and firms with more bank debt. Costs increase with the time it takes to sell assets and the number of disputes the trustee has to deal with. The firm recovery rate is on average 37%, while the bank recovers on average 80%. The firm recovery rate is influenced by the asset structure and the capital structure. Moreover, an opportunity to continue operations in bankruptcy is chosen by about half the firms and this has a positive effect on recoveries.

This paper shows how uncertainty about liquidity demand can lead to a high degree of dollarization in the banking system. I study a model where the demand for currency in each period is random, and where it is easier for banks to borrow in local currency in times of crisis than in dollars. Banks choose a portfolio composed of local currency, dollars, and real loans. Compared to the anticipated transactions demand for each currency, I show that the bank will hold a relatively large amount of dollars and a relatively small amount of local currency. I also show the existence of a dollarization multiplier : as the anticipated transactions demand for dollars increases, the dollarization of the banking sector increases more than proportionately.

A Bázel-2 tőkeegyezmény magyarországi bevezetése új lendületet adott a sokváltozós csőd-előrejelzési módszerek alkalmazásnak és továbbfejlődésének. A cikk a nemzetközi szakirodalomban és pénzintézeti gyakorlatban leggyakrabban alkalmazott négy csőd-előrejelzési módszer becslőképességét hasonlítja össze. Empirikus vizsgálattal alátámasztva igyekszik választ találni arra a kérdésre, vajon a kevésbé szigorú alkalmazási feltételeket támasztó szimulációs eljárások megbízhatóbb csődelőrejelzést, valamint a nem fizetési valószínűségek jobb becslését tesznek-e lehetővé, mint a hagyományos matematikai-statisztikai alapú eljárások. Az empirikus vizsgálat eredményei arra is rávilágítanak, hogy a főkomponens-elemzéssel nem feltétlenül növekszik az előrejelző képesség. Journal of Economic Literature (JEL) kód: C52, C53, C45, G33., Hungarys adoption of Basel II Capital Accord gave new impetus to applying and im-proving multivariate bankruptcy-prediction methods. This article compares the four most commonly applied bankruptcy-prediction techniques in literature and banking practice, in terms of estimation performance. The study attempts to decide, on the basis of empiri-cal research, whether the simulation procedures with less rigorous conditions of applica-tion provide a more reliable bankruptcy prediction and probability of default estimation than traditional mathematic/statistical techniques do. The empirical research reveals that principle-component analysis does not necessarily guarantee better predictive power.

This paper evaluates the capacity of five structural credit risk models to forecast default rates. In contrast to previous studies with similar objectives, the paper employs firm-level data and finds that model-based forecasts of default rates tend to be unbiased and to deliver point-in-time errors that are small in both statistical and economic terms. In addition, in- and out-of-sample regression analysis reveals that the models account for a significant portion of the variability of credit risk over time but fail to fully reflect its dependence on macroeconomic cycles.

In the narrow sense, financial stability is defined as price stability and the soundness of financial institutions. Although this definition can be extended to cover the functioning of financial markets, asset price volatility, risk management practices of institutions, etc., financial soundness of banks is still at the center of stability concerns. In this context, several methods have been developed to measure stability in terms of a common metric. In this paper, we analyze the stability of the Turkish banking sector in the period of 2000-2006 by applying an option theory based method that allows the estimation of default probability of the sector. We conclude that stability (default probability) was the weakest (highest) in 2001 and it entered in a healthy path after 2003. Furthermore, the sector resisted strongly to the May-June turmoil of 2006. Soundness of the sector remains relatively stable following the turmoil period

The results of stress tests of the Czech banking sector based on credit risk and credit growth models, applied to the household and corporate sector are presented in the paper. The use of these newly developed models enables the stress tests to be linked to the CNB's official quarterly macroeconomic forecast. In addition, the article updates the stress scenarios, including simple sensitivity analyses of credit risk for individual sectors. Based on the analysis, an answer is sought to the question of whether the observed credit growth to corporate sector and households poses any threat to the stability of the banking sector. The analyses conclude that the banking sector as a whole seems to be resilient to the macroeconomic shocks under consideration.

Over the past one and a half years, the amount of credit granted by banks to Hungarian local governments has doubled, and the gap between their cash deficit and net additional indebtness has increased. This borrowing boom is not the result of a drastic change in the financial management of local governments, but stems primarily of the fear of statutory tightening of borrowing conditions and their propensity to hold reserves. As the current statutory regulation does not represent an effective restriction on debt, indebtedness in the sector is limited only by the market – i.e. banks’ lending propensity. Although it is not unprecedented in international practice that this kind of market coordination may – with minor fluctuations – be able to keep indebtedness at an acceptable level, the uncertainties in the financial management of local governments and the weak transparency related to their long-term or contingent liabilities mean that the conditions for this kind of coordination are not fully in place in Hungary. Our survey of banks underpins this assumption, revealing that due to the sharp competition between banks, local governments are in a strong bargaining position vis-a-vis credit institutions, as – due to the lack of information and a high level of uncertainty – credit institutions are limited in the use of more sophisticated risk assessment techniques generally used in the corporate sector, and thus their lending is based on the expected continuity of local government operations.

Banking supervisory agencies around the world have been utilizing CAMELS rating system (or variants) for many years. In this study, financial ratios were used to calculate representative CAMELS ratings and components for 1996 - 2000. The financial ratios, which were used to calculate the CAMELS components, were utilized to predict the transfer of commercial banks in 2001 to the SDIF by the use of discriminant analysis, logistic regression and neural network models. Findings of the study presented that it was not possible to predict the transfer of a bank to SDIF by the use of CAMELS ratios

The firms and economic sectors that are in an advanced state of development and also have a good competitive position, have a lower degree of insolvency. But at the same time, new firms, the ones that activate in new sectors, are more exposed. As well, in the new context of adherence’s countries to the EU, increases the interest in the study of movements from the level of the maintenance of the performances of Central and East Europe entities on a competitive market and implicitly in the study of bankruptcy’ risk. We can notice a big increase in the number of bankruptcies from the commercial sector but must not be regarded as a negative aspect. The number of explosions of companies that was registered in all economies in transition from Central and Eastern Europe, made them represent the majority within the companies that were founded after 1989. This development has determined a strong competition, which was also triggered by the free access to the common market. In Romania, the number of bankruptcies in the last two years was strongly influenced by the positive effects of the new procedure which was simplified for the bankruptcy law. The purpose of this paper is focus on the main factors that provoke the bankruptcy’s entities by exemplify the insolvency level registered in Central and Eastern Europe countries, referring to Romania. Also, our paper offers comparison and explanation of movements in the level and structure of insolvency.

From 1980 to 2004, the number of personal bankruptcy filings in the United States increased more than five-fold, from 288,000 to 1.5 million per year. Lenders responded to the high filing rate with a major lobbying campaign for bankruptcy reform that led to the adoption in 2005 of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which made bankruptcy law much less debtor-friendly. The paper first examines why bankruptcy rates increased so sharply. I argue that the main explanation is the rapid growth in credit card debt, which rose from 3.2% of U.S. median family income in 1980 to 12.5% in 2004. The paper then examines how the adoption of BAPCPA changed bankruptcy law. Prior to 2005, bankruptcy law provided debtors with a relatively easy escape route from debt, since credit card debt and other types of debt could be discharged in bankruptcy and even well-off debtors had no obligation to repay. BAPCPA made this escape route less attractive by increasing the costs of filing and forcing some high-income debtors to repay from post-bankruptcy income. However, because many consumers are hyperbolic discounters, making bankruptcy law less debtor-friendly will not solve the problem of consumers borrowing too much. This is because, when less debt is discharged in bankruptcy, lending becomes more profitable and lenders increase the supply of credit. The paper examines the determinants of an optimal bankruptcy law. It also considers the relationship between bankruptcy law and regulation of lending behavior and discusses proposals that would reduce lenders' incentives to supply too much credit to debtors who are likely to become financially distressed.

Costly monitoring may lead to credit rationing in equilibrium in an economy without any adverse selection or moral hazard problems. Given the widespread phenomenon of government intervention in credit markets in developing and developed countries, the natural question then is, How effective are these government programs? I incorporate government loan programs in a simple, closed, pure exchange economy with borrowing and lending. Intermediation of funds is facilitated in credit markets characterized by a costly state verification problem. I then show that government loan programs (financed with lump-sum taxes) with co-financing can increase credit rationing when the private lender is the prior claimant in the event of a default. Moreover such programs unambiguously decrease the expected utility of both borrowers and lenders. On the other hand, when the government is the prior claimant, such programs decrease credit rationing and increase the expected utility of borrowers. Finally, with proportional repayments there is no effect on credit rationing or expected utility of agents.

A "shock therapy" might have different impacts between large and small firms. In this paper, we focus on the clients of two large failed Japanese banks - the Long-term Credit Bank of Japan (LTCB) and the Nippon Credit Bank (NCB). We first show that subsequent events after the bank failures allowed the new LTCB to adopt a "shock therapy" but kept the new NCB to face "soft budget constraints". We then show that the different therapies made performances of these two banks' customers very different. Under the shock therapy, large firms showed significant recovery of their profits but small firms did not. In contrast, under the soft budget constraints, large firms did not show recovery and small firms experienced significant decline in their profits when the new bank terminated the banking relationship.

We present statistical backtesting procedures applicable in situations where few and heterogeneous probabilities have to be evaluated, as is typically the case when forecasting country default risk. These tests are applied to a sample of default probabilities assessed for 19 emerging market and transition countries by estimating a Merton-type credit risk model using bond market data. For the estimation, we use a maximum likelihood technique based on time series of market data. Thereby, we avoid the drawbacks of alternative approaches commonly used in the literature.

Outright bank failures without prior indication of financial instability are very rare. Supervisory authorities monitor banks constantly. Thus, they usually obtain early warning signals that precede ultimate failure and, in fact, banks can be regarded as troubled to varying degrees before outright closure. But to our knowledge virtually all studies that predict bank failures neglect the ordinal nature of bank distress. Exploiting the distress database of the Deutsche Bundesbank we distinguish four different distress events that banks experience. Only the worst entails a bank to exit the market. Weaker orders of distress are, first, compulsory notifications of the authorities about potential problems, second, corrective actions such as warnings and hearings and, third, actions by banking pillar's insurance schemes. Since the four categories of hazard functions are not proportional, we specify a generalized ordered logit model to estimate the respective probabilities of distress simultaneously. Our model estimates each set of probabilities with high accuracy and confirms, first, the necessity to account for different kinds of distress events and, second, the violation of the proportional odds assumption implicit in most limited dependent analyses of bank failure.

In this paper we develop a contingent valuation model for zero-coupon bonds with default. In order to emphasize the role of maturity time and place of the lender's claim in a firm's debt hierarchy, we consider a firm that issues two bonds with different maturities and different seniorage. The model allows us to analyze the implications of both debt renegotiation and capital structure of a firm on the prices of bonds. We obtain that renegotiation brings about a significant change in the bond prices and that the effect is dispersed through various channels: increasing the value of the firm, reallocating payments, and avoiding costly liquidation. Moreover, the presence of two creditors leads to qualitatively different implications for pricing, while emphasizing the importance of bond covenants and renegotiation of the entire debt.

This paper examines how the investment of financially constrained firms varies with their level of internal funds. We develop a theoretical model of optimal investment under financial constraints. Our model endogenizes the costs of external funds and allows for negative levels of internal funds. We show that the resulting relationship between internal funds and investment is U-shaped. In particular, when a firm's internal funds are negative and sufficiently low, a further decrease leads to an increase in investment. This effect is driven by the investor's participation constraint: when part of any loan must be used to close a financing gap, the investor will provide funds only if the firm invests at a scale large enough to generate the revenue that enables the firm to repay. We test our theory using a data set with close to 100,000 firm-year observations. The data strongly support our predictions. Among other results, we find a negative relationship between measures of internal funds and investment for a substantial share of financially constrained firms. Our results also help to explain some contrasting findings in the empirical investment literature.

Pour une entreprise, le maintien d’une croissance soutenue pendant une longue période est délicat. Il suppose, outre des conditions de marché favorables, un pilotage du rythme de développement adapté aux contraintes financières.

The significance of credit risk models has increased with the introduction of the New Basel Accord, known as Basel II. The aim of this study is to examine default rate modeling. This paper follows two possible approaches to macro credit risk modeling, empirical models and a latent factor model based on Merton. We employ data over the time period from 1988 to 2003 for the Finnish economy, including time series of bankruptcy, numbers of firms and industry-specific data. Linear vector autoregressive models are used in the case of a dynamic empirical model. We examine how significant macroeconomic indicators determine the default rate in the whole economy and in industry-specific sectors. Since these models cannot provide microeconomic foundations, we employ a model with one latent factor, although multi-factor models are also considered. This estimation helps us to understand the relationships between credit risk and macroeconomic indicators. Both models can be used for default rate prediction or stress testing by central authorities.

The importance of credit-risk models has increased with the introduction of the New Basel Capital Accord (Basel II). This paper follows Merton´s approach to structural analysis, toward default-rate modeling. A latent-factor model is introduced within this framework. Estimation of this model can help further our understanding of the relationship between credit risk and macroeconomic indicators. The results have been used for stress testing the Czech banking sector.

Derivative contracts, swaps, and repos enjoy "super-senior" status in bankruptcy: they are exempt from the automatic stay on debt and collateral collection that applies to virtually all other claims. We propose a simple corporate finance model to assess the effect of this exemption on firms' cost of borrowing and incentives to engage in swaps and derivatives transactions. Our model shows that while derivatives are value-enhancing risk management tools, super-seniority for derivatives can lead to inefficiencies: collateralization and effective seniority of derivatives shifts credit risk to the firm's creditors, even though this risk could be borne more efficiently by derivative counterparties. In addition, because super-senior derivatives dilute existing creditors, they may lead firms to take on derivative positions that are too large from a social perspective. Hence, derivatives markets may grow inefficiently large in equilibrium.

CDS spreads are often used as market’s view of credit risk. There is no popular alternative to it; perhaps only the distance-to-default measure based on Merton (1974) comes close to it. In this paper we investigate the relationship between these two measures for large European banks in post subprime crises era. The analysis makes use of conventional Granger causality test statistics for individual banks and for the whole panel data. As for the results, we find that the lead-lag relationship between these variables varies over time and over different banks and economic regimes. The lead of distance-to-default is stronger for banks in problem countries (PIGS), during European debt crises, for relatively small banks and when there are large changes in CDS spread. These results suggest that we may have predictive power by not only using the CDS spread, but also other measures such as the distance-to-default.

Transaction cost shocks in financial markets are known to affect asset prices. This paper analyses how changes in transaction costs may affect the value of assets that banks use to collateralise borrowings in monetary policy operations. Based on a simple asset pricing model and employing a dataset of hypothetical Eurosystem collateral positions, we simulate and quantify the resulting change in collateral value pledged by counterparties to the Eurosystem, resulting from a transaction cost shock. A 10 basis point increase in transaction costs entails a direct -0.30% decrease of collateral value and a -0.07% decrease when adjusted for the expected reduction in the number of trades of each asset. We conclude that banks will on average suffer small collateral losses while selected institutions could face a considerably larger collateral decrease.

Although few outside of financial circles have heard of covered bonds, they have emerged as an important and efficient funding channel for Canadian mortgage lending, according to a new report released today from the C.D. Howe Institute. In “How to Make the World Safe for (and from) Covered Bonds,” author Finn Poschmann addresses the fact that covered bond issuance in Canada has a regulatory limit of 4 percent of bank assets, a rate that is lower than in most advanced economies, and explores the case for expanding that limit.

This paper considers a dynamic model in which shareholders of a firm in distress have a choice of whether the firm proceeds to debt restructuring or direct liquidation at an arbitrary time. In the model, we show the following results. Fewer asset sales, lower financing, debt renegotiation, and running costs, a lower premium to the debt holders, a lower cash flow volatility, and a higher initial coupon increase the shareholders׳ incentive to choose debt restructuring to avoid full liquidation. In the debt renegotiation process, the shareholders arrange the coupon reduction and use equity financing to retire a part of the debt value to the debt holders. The timing of debt restructuring always coincides with that of liquidation without debt renegotiation. Most notably, the shareholders do not prefer asset sale in debt restructuring even if they face high financing costs. The possibility of debt renegotiation in the future increases the initial leverage ratio in the optimal capital structure.

This paper proposes a simple technical approach for the analytical derivation of Point-in-Time PD (probability of default) forecasts, with minimal data requirements. The inputs required are the current and future Through-the-Cycle PDs of the obligors, their last known default rates, and a measurement of the systematic dependence of the obligors. Technically, the forecasts are made from within a classical asset-based credit portfolio model, with the additional assumption of a simple (first/second order) autoregressive process for the systematic factor. This paper elaborates in detail on the practical issues of implementation, especially on the parametrization alternatives. We also show how the approach can be naturally extended to low-default portfolios with volatile default rates, using Bayesian methodology. Furthermore, expert judgments on the current macroeconomic state, although not necessary for the forecasts, can be embedded into the model using the Bayesian technique. The resulting PD forecasts can be used for the derivation of expected lifetime credit losses as required by the newly adopted accounting standard IFRS 9. In doing so, the presented approach is endogenous, as it does not require any exogenous macroeconomic forecasts, which are notoriously unreliable and often subjective. Also, it does not require any dependency modeling between PDs and macroeconomic variables, which often proves to be cumbersome and unstable., Comment: Keywords: Prediction, Probability of Default, PD, Default Rates, Through-the-Cycle, TtC, Point-in-Time, PiT, Credit Portfolio Model, Systematic Factor, Macroeconomic Factor, Time Series, Autoregression, Bayesian Analysis, IFRS 9, Accounting, Financial Instruments, Lifetime, Expected Credit Losses

This paper analyzes a structural model of a levered firm that can renegotiate debt outside and in distress. The firm renegotiates outside distress to waive its financing covenant when raising investment funds and renegotiates in distress to avoid bankruptcy costs. Incorporating the ability to renegotiate both outside and in distress is crucial to explaining timing patterns of debt renegotiations. Capturing realistic incentives and timing patterns of renegotiations allows us to quantify the value of creditor governance. We explain a rich set of empirical facts in terms of influence of renegotiable debt on security values and corporate policies.

In this paper, we unveil a disregarded benefit of product market competition for small and medium enterprises (SMEs). In a model where firms are financed through collateralized bank loans and compete à la Cournot, we introduce a probability of bankruptcy. We investigate how the number of rivals and the existence of outsiders willing to acquire productive assets of distressed incumbents affect the equilibrium share of investment financed with bank credit. Using a sample of Italian SMEs, we find evidence that product market competition impacts positively on the share of investment financed with bank credit only when outsiders are absent. (A shorter version of this working paper has been published in SMALL BUSINESS ECONOMICS)

The following paper is a theoretical and empirical study. The terminological differences between bankruptcy and insolvency have been indicated and compared in the article. Most frequently considered aspects of bankruptcy appear in definitions. The first of them emphasizes the economic character of bankruptcy. Insolvency is a culmination of a lack of financial means and the loss of solvency, which does not have a fading tendency, but develops into a permanent phenomenon. In legal terms, insolvency is an institution, whose purpose is to stop the accumulation of debts and most frequently it consists on the liquidation of the debtor's estate. The main purpose of the study is a critical review of the scientific achievements of the representatives of evolutionary economics within the scope and mechanism of bankruptcy and the survival of enterprises. The analyzed case of the Beta company, which went bankrupt, indicates that the companies which are not able to undertake proper adjustments to competitive conditions of the market at the right moment are eliminated from it. The theoretical law “the survival of the fittest” finds then its reflection in practice. The following research methods were used in the article: a descriptive analysis and the trajectories of J. Argenti in terms of models. Detailed examinations of files of insolvency proceedings of the Beta company have been carried out.

Credit risk – the risk that borrowers will not repay their loans – is one of the main risks that financial intermediaries face, and has been the underlying driver of most systemic banking crises in advanced economies over recent decades. This paper explores the ex post credit risk experience – the 'credit loss' experience – of the Australian banking system. It does so using a newly compiled dataset covering bank-level credit losses over 1980 to 2013. The Australian credit loss experience is dominated by two episodes: the very large losses around the early 1990s recession and the losses during and after the global financial crisis. The available data indicate the above-average losses during both periods were on lending to businesses. Credit losses on housing loans during and after the global financial crisis were minimal in Australia. Consistent with this, an econometric panel-data model that properly accounts for portfolio composition indicates that conditions in the business sector, rather than those in the household sector, drove credit losses in Australia during the period studied. The data also indicate that the very worst credit loss outcomes – including those that led to the failure of several state government-owned banks in the early 1990s – were driven by poor lending standards.

Tracing the SEC ban on the short selling of financial stocks in September 2008, this paper investigates whether such selling activity before the 2008 short ban reflected financial companies’ risk exposures in the subprime crisis. The evidence suggests that short sellers sold short stocks that had the greatest asset and insolvency risk exposures, and that the short selling of financial firms’ stocks was not significantly greater than that of non-financial firms. When the short ban was in effect, the market quality of financial stocks without subprime asset exposure had deteriorated to a larger degree than that of financial companies with subprime asset exposure. The findings imply that such a regulation may mute the market disciplining effects of investors and may also serve as a counterweight to any perceived macro or systemic risk reduction benefits resulting from such a ban.

We develop a dynamic model of banking to assess the effects of liquidity and leverage requirements on banks' insolvency risk. In this model, banks face taxation, flotation costs of securities, and default costs and maximize shareholder value by making their financing, liquid asset holdings, and default decisions in response to these frictions as well as regulatory requirements. Our analytic characterization of the bank policy choices shows that imposing solely liquidity requirements leads to lower bank losses in default at the cost of an increased likelihood of default. Combining liquidity requirements with leverage requirements reduces drastically both the likelihood of default and the magnitude of bank losses in default.

The Great Recession offers a unique opportunity to analyze the performance of credit risk models under conditions of economic stress. We focus on the performance of models of credit risk applied to risk-segmented credit card portfolios. Specifically, we focus on models of default and loss and analyze three important sources of model risk: model selection, model specification, and sample selection. Forecast errors can be significant along any of these three model-risk dimensions. Simple linear regression models are not generally outperformed by more complex or stylized models. The impact of macroeconomic variables is heterogeneous across risk segments. Model specifications that do not consider this heterogeneity display large projection errors across risk segments. Prime segments are proportionally more severely impacted by a downturn in economic conditions relative to the subprime or near-prime segments. The sensitivity of modeled losses to macroeconomic factors is conditional on the model development sample. Models estimated over a period that does not incorporate a significant period of the Great Recession may fail to project default rates, or loss rates, consistent with those experienced during the Great Recession.

In this paper we treat economic and legal advantages to firms in business financing through the issuance of bonds. Besides theoretical analysis paper includes the empirical analysis, a survey conducted in 50 businesses, including individual businesses and corporations, about the types of financing they use. The objective was to obtain necessary information regarding the form of business financing in our country. The research shows that the majority of businesses surveyed stated that they started businesses with the bank loans due to lack of own capital. Most of the businesses surveyed feel the need for new sources of funding. The majority of surveyed businesses have no knowledge on how capital markets work in practice. The use of alternative financing methods in Kosovo hinders the lack of adequate markets for the trading of financial instruments. There is not yet a legal infrastructure that regulates the functioning of the capital market, especially the issue of bonds as funding conduit of great importance for large companies. Through hypotheses testing is proved that the development of the capital market would give the firms the opportunity of issuance of bonds as a funding source.

Following the global financial crisis of 2007-2009, bank regulators have adopted special resolution procedures for global systemically important banks. They now have the power to seize these banks when their capital falls below some threshold, and to sell them back to new investors after having restructured them. This paper characterizes the optimal intervention thresholds and studies the interactions with the dividend and equity issuance policies of global systemically important banks. The main findings of our analysis for the optimal regulatory policy are: First, when the restructuring costs are high, it is optimal for regulators to impose dividend payout restrictions for undercapitalized banks. Second, in states of the economy, where capital supply becomes more scarce, these results are aggravated. In particular, regulators intervene relatively earlier, set stricter dividend payout restrictions and require relatively higher initial capital of the banks. Finally, capital supply constraints have an important impact on the financing decisions of shareholders. Banks recapitalize less frequently when the cost of raising equity is high or when the external capital supply is plentiful.

This thesis contributes to the analysis and measure of systemic risk through four chapters. In the first chapter, we discuss the notion of systemic risk and detail the methodological issues of modeling. The second chapter proposes a structural model of solvency contagion. Within an equilibrium model, we measure the contagion by identifying the direct effect of an external shock and its propagation. In the third chapter, we provide a pricing framework for financial institution’s debt encompassing the effect of interconnections between institutions. We compute a risk premium specific to interconnections. In the last chapter, we model the joint effects of the shocks on the asset side and on the liability side of a financial institution. We adapt the usual risk measures to pinpoint the funding liquidity risk and the market liquidity risk. Lastly, we explain how to set the level and the composition of regulatory reserves to control for default risk.

Merton (1974) suggested a structural model for defa ult prediction which allows using timely information from the equity market. Application of this model is not straightforward and several alternatives exist in the specification of the mode l. Academic literature has adopted methods presumably used by practitioners. However, recent s tudies discovered that these methods result in inferior estimates. We empirically examine various specification alternatives and discover that the goodness of prediction is only slightly sensitive t o different choices of default barrier. The choice of assets expected return and assets volatility appear s to be crucial. Equity historical return and histo rical volatility produce underbiased estimates for assets expected return and assets volatility especially f or defaulting firms. Acknowledging these problems we suggest specifications that improve the model’s accuracy.

Life insurers typically grant policyholders a surrender option. We demonstrate that the resulting lapse risk could materialise in the form of a "policyholder run" if interest rates were to increase sharply. An inverse stress test based on a unique set of regulatory panel data suggests that German life insurers have become less resistant to an upward interest rate shock in the course of the financial and sovereign debt crisis from 2007 to 2011. Despite the challenges presented by the low-interestrate environment, the situation has not deteriorated since then. In light of the quantitative easing (QE) of monetary policy in the euro area, life insurers may find it difficult to continue this positive trend.

An evaluation problem exists when winding up executory contracts in case of insolvency. The trustee has difficulties in accurately considering the claim for damages that arises if he chooses to reject a contract instead of accepting it. An unequal treatment of creditors and inefficiencies follow. However, a simple reform can solve this problem. If an executory contract is accepted by the trustee, there should be the same claim for damages as if it had been rejected. Only the difference between this claim for damages and the initial claim should be paid directly out of the estate.

We develop a macroeconomic portfolio stress test that is specifically geared towards small and medium-sized banks. We combine a credit risk stress test which simulates credit impairments via a CreditMetrics type multi-factor portfolio model with an income stress test in the form of dynamic panel data regressions. Based on a stress scenario that extends experience of the financial crisis by integrating the current low interest rate environment, we analyse the stress impact on banks' capital ratios. Our results show that savings banks and cooperative banks prove to be very resilient to macroeconomic stress, while more than 6% of our sample's credit banks "fail" the stress test, mainly due to their lack of capital. The main stress drivers prove to be credit impairments rather than other net income components.