Skip to main navigation menu Skip to main content Skip to site footer
FrancoAngeli Journals

Articles

No. 2 (2021)

Early warning system and credit risk governance: Early crisis management from the financial creditor perspective

DOI
https://doi.org/10.3280/cgrds2-2021oa12637
Submitted
settembre 29, 2021
Published
2022-01-26

Abstract

The ability to estimate the probability of default has always been one of the main goals of financial institutions and, in the near future, will certainly be the key to coping with the increase in non-performing exposures due to the impacts of the Covid-19 pandemic emergency. This paper aims to investigate the credit risk management practices and tools adopted to detect the company’s economic and financial distress at an early stage. Accordingly, an in-depth review of the insolvency prediction models was first conducted to illustrate limitations and strengths widely discussed in the literature. The case study analysis was subsequently used to describe both the Early Warning System (EWS) methodology and the internal governance practices adopted to monitor and promptly manage signs of deterioration in creditworthiness. The results highlights the necessity to combine quantitative models with the judgmental approach in order to set up an effective monitoring process capable of intercepting anomalies and avoiding misclassification. The case study analysis also shows how the early involvement of debt restructuring experts is a key element in defining actions to prevent default events.

References

  1. Aebi V., Sabato G., Schmid M. (2012). Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking & Finance, 36(12): 3213-3226. DOI: 10.1016/j.jbankfin.2011.10.020.
  2. Agarwal V., Taffler R. (2008). Comparing the performance of market-based and accounting-based bankruptcy prediction models. Journal of Banking & Finance, 32(8): 1541-1551. DOI: 10.1016/j.jbankfin.2007.07.014.
  3. Altman E.I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The journal of finance, 23(4), 589-609. DOI: 10.2307/2978933.
  4. Altman E. I., Hartzell J., Peck M. (1998). Emerging market corporate bonds a scoring system. In: Levich R.M. (eds) Emerging Market Capital Flows. The New York University Salomon Center Series on Financial Markets and Institutions, vol 2. Springer, Boston, MA. DOI: 10.1007/978-1-4615-6197-2_25.
  5. Altman E.I., Hotchkiss E. (2010). Corporate financial distress and bankruptcy: Predict and avoid bankruptcy, analyze and invest in distressed debt (Vol. 289). Hoboken: John Wiley & Sons.
  6. Altman E.I., Danovi A., Falini, A., (2013). Z-Score Models' Application to Italian Companies Subject to Extraordinary Administration (November 5, 2015). Journal of Applied Finance, 23(1).-- Available at SSRN: https://ssrn.com/abstract=2686750.
  7. Altman E.I., Iwanicz‐Drozdowska M., Laitinen E.K., Suvas A. (2017). Financial distress prediction in an international context: A review and empirical analysis of Altman's Z‐score model. Journal of International Financial Management & Accounting, 28(2), 131-171. DOI: 10.1111/jifm.12053.
  8. Altman E.I., Brady B., Resti A., Sironi A. (2005). The link between default and recovery rates: Theory, empirical evidence, and implications. The Journal of Business, 78(6), 2203-2228. DOI: 10.1086/497044.
  9. Amaduzzi A. (1957). Conflitto ed equilibrio di interessi nel bilancio dell’impresa. Bari: Cacucci.
  10. Arcari A.M. (2018). Preventing crises and managing turnaround processes in SMEs. The role of economic measurement tools, Management Control, 3, 131-155. DOI: 10.3280/MACO2018-003007.
  11. Beaver W.H. (1966). Financial ratios as predictors of failure. Journal of accounting research, 71-111. DOI: 10.2307/2490171.
  12. Beaver W.H., Correia M., McNichols M.F. (2012). Do differences in financial reporting attributes impair the predictive ability of financial ratios for bankruptcy?. Review of Accounting Studies, 17(4), 969-1010. DOI: 10.1007/s11142-012-9186-7.
  13. Beaver W.H., McNichols M.F., Rhie J.W. (2005). Have financial statements become less informative? Evidence from the ability of financial ratios to predict bankruptcy. Review of Accounting studies, 10(1), 93-122. DOI: 10.1007/s11142-004-6341-9.
  14. Babel B., Kaltenbrunner G., Kinnebrock S., Pancaldi L., Richter K., Schneider S. (2012). First-mover matters: Building credit monitoring for competitive advantage. Mckinsey Work. Pap. Risk, 37.
  15. Black F., Cox, J.C. (1976). Valuing corporate securities: Some effects of bond indenture provisions. The Journal of Finance, 31(2), 351-367. DOI: 10.1111/j.1540-6261.1976.tb01891.x.
  16. Black F., Scholes M. (1973), The pricing of options and corporate liabilities. Journal of Political Economy, 81, 637–654. DOI: 10.1142/9789814759588_0001.
  17. Boyd J.H., Prescott E.C. (1986). Financial intermediary-coalitions. Journal of Economic theory, 38(2), 211-232. DOI: 10.1016/0022-0531(86)90115-8.
  18. Capuano P. (2013). La crisi finanziaria internazionale: il ruolo della funzione di risk management delle banche. Roma: Aracne.
  19. Celli M., Paoloni M. (2018). Crisi delle PMI e strumenti di warning: un test di verifica nel settore manifatturiero, Management Control, 2: 85-106. DOI: 10.3280/MACO2018-002005.
  20. Cenciarelli VG., Mattei M.M., Greco G. (2020). Pressione competitiva e previsione dell’insolvenza. Management Control, 3: 36-58. DOI:10.3280/MACO2020-003003.
  21. Chava S., Jarrow R.A. (2004). Bankruptcy prediction with industry effects. Review of finance, 8(4), 537-569. DOI: 10.1093/rof/8.4.537.
  22. Chudson W.A. (1945). The Pattern of Corporate Financial Structure. New York: National Bureau of Economic Research.
  23. Ciambotti M. (2005), Governo strategico d'impresa. Teoria, modelli e sistemi di pianificazione (Vol. 1, pp. 1-420), Torino: Giappichelli Editore.
  24. Diamond D.W. (1984). Financial intermediation and delegated monitoring. The review of economic studies, 51(3), 393-414. DOI: 10.2307/2297430.
  25. Duffie D., Singleton K.J. (1999). Modeling term structures of defaultable bonds. The review of financial studies, 12(4), 687-720. DOI: 10.1093/rfs/12.4.687.
  26. Ellul A., Yerramilli V. (2010). Stronger risk controls, lower risk: Evidence from US bank holding companies. Retrieved from National Bureau of Economic Research. In: http://www.nber.org/papers/w16178.pdf.
  27. Esposito De Falco S.E. (2014). Corporate governance per il governo dell'impresa. Milano: McGraw-Hill Education.
  28. FitzPatrick P. (1932). A Comparison of ratios of successful industrial enterprise with those of failed companies. The Certified Public Accountant, 598-605, 656-662, 727-731.
  29. Giannessi E. (1969), Considerazioni critiche intorno al concetto di azienda. In: Scritti in onore di Giordano Dell’Amore, 461-588. Milano: Giuffrè.
  30. Hillegeist S.A., Keating E.K., Cram D.P., Lundstedt K.G. (2004). Assessing the probability of bankruptcy. Review of accounting studies, 9(1), 5-34. DOI: 10.1023/B:RAST.0000013627.90884.b7.
  31. Hinrichs J. (2008). Creating Synergy By Intergrating Enterprise Risk Management And Governance. Journal Of Risk Management In Financial Institutions, 2(2): 155-164. In: https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=36961245&lang=it&site=ehost-live&scope=site.
  32. Hodges J.L., Le Cam L. (1960). The Poisson approximation to the Poisson binomial distribution. The Annals of Mathematical Statistics, 31(3), 737-740. In: https://www.jstor.org/stable/2237582.
  33. Honohan P. (2008). Risk management and the costs of the banking crisis. National Institute Economic Review, 206, 15-24. DOI: 10.1177/0027950108099839.
  34. Institute of International Finance (2008). Final report of the IIF committee on market best practices: principles of conduct and best practice recommendations.
  35. International Monetary Fund (2014). Global Financial Stability Report.
  36. Jarrow R.A., Lando D., Turnbull S.M. (1997). A Markov model for the term structure of credit risk spreads. The review of financial studies, 10(2), 481-523. DOI: 10.1093/rfs/10.2.481.
  37. Kingman J.F.C. (1992). Poisson processes (Vol. 3). Oxford: Clarendon Press.
  38. Lando D. (1998). On Cox processes and credit risky securities. Review of Derivatives research, 2(2), 99-120. DOI: 10.1007/BF01531332.
  39. Last G., Penrose M. (2017). Lectures on the Poisson process (Vol. 7). Cambridge: Cambridge University Press.
  40. Laitinen E.K. (1992). Prediction of failure of a newly founded firm. Journal of Business Venturing, 7(4), 323-340. DOI: 10.1016/0883-9026(92)90005-C.
  41. Litterman R., Iben T. (1991). Corporate bond valuation and the term structure of credit spreads. Journal of portfolio management, 17(3), 52. DOI: 10.3905/jpm.1991.409331.
  42. Madan D.B., Unal H. (1998). Pricing the risks of default. Review of derivatives Research, 2(2), 121-160. DOI: 10.1007/BF01531333.
  43. Merton R.C. (1974). On the pricing of corporate debt: The risk structure of interest rates. The Journal of finance, 29(2), 449-470. DOI: 10.2307/2978814.
  44. Merwin C.L. (1942). Financing small corporations in five manufacturing industries, 1926-1936. New York: National Bureau of Economic Research.
  45. Mongiardino A., Plath C. (2010). Risk governance at large banks: have any lessons been learned? Journal of Risk Management in Financial Institutions, 3(2), 116-123. Available from: https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=48811120&lang=it&site=ehost-live&scope=site.
  46. Mottura P. (2008). Crisi bancarie: un problema di governance. Bancaria, 12, 15-28.
  47. Nardon M. (2004). Un’introduzione al rischio di credito. Università Ca’ Foscari di Venezia.
  48. Norden L., Weber M. (2010). Credit line usage, checking account activity, and default risk of bank borrowers. The Review of Financial Studies, 23(10), 3665-3699. DOI: 10.1093/rfs/hhq061.
  49. Pesaran M.H., Schuermann T., Treutler B.J., Weiner S.M. (2006). Macroeconomic dynamics and credit risk: a global perspective. Journal of Money, Credit and Banking, 1211-1261. In: https://www.jstor.org/stable/3839005.
  50. PWC (2019). Early Warning System: l’evoluzione del monitoraggio predittivo. In: https://www.pwc.com/it/it/publications/assets/docs/early-warning-system.pdf.
  51. Quagli A., Danovi A. (2010), Crisi aziendali e processi di risanamento. Milano: IPSOA.
  52. Ramakrishnan R.T., Thakor A.V. (1984). Information reliability and a theory of financial intermediation. The Review of Economic Studies, 51(3), 415-432. DOI: 10.2307/2297431.
  53. Saldías M. (2013). Systemic risk analysis using forward-looking distance-to-default series. Journal of Financial Stability, 9(4), 498-517. DOI: 10.1016/j.jfs.2013.07.003.
  54. Sancetta G. (2007). Gli intangibles e le performance dell’impresa. Padova: Cedam.
  55. Sancetta G., Boldreghini F. (2020). La ristrutturazione aziendale nella complessità intersistemica. In: AA.VV., Contributi in onore di Gaetano Maria Golinelli (pp. 442-457), Napoli: Rogiosi Editore.
  56. Senior Superviors Group. (2009). Observations on risk management practices during the recent market turbulence. Senior Superviors Group.
  57. Smith R., Winakor A. (1935). Changes in Financial Structure of Unsuccessful Industrial Corporations. Urbana: University of Illinois Bureau of Business Research.
  58. Tirloni G., Antonietti A. (2020). Le nuove linee guida EBA sulla concessione e monitoraggio del credito. In: https://www.dirittobancario.it/approfondimenti/credito/le-nuove-linee-guida-eba-sullaconcessione-e-monitoraggio-del-credito.
  59. Vella P. (2019). La prima direttiva europea su ristrutturazione e insolvenza. Il Foro Italiano, 144(10), 423-434.

Metrics

Metrics Loading ...