We show that sovereign debt impairments can have a significant impact on financial markets and real economies through a credit ratings channel. Specifically, we find that firms reduce their investment and reliance on credit markets due to a rising cost of debt capital following a sovereign...

We study the effects of the reform of the system of severance payments (TFR) of Italian employees on the cost and the access to credit for small and medium-size enterprises (SMEs). The most direct consequence of the reform is to reduce in the long run the amount of liquid assets available to...

This paper attempts to explain the link between corporate investments in different phases of the economic cycle and company financial distress. The data were derived from the Estonian Centre of Registers and Information Systems and contained the population of Estonian businesses from four...

Central banks and supervisory authorities regularly conduct stress tests of banks. As losses accumulate in stress scenarios, banks' equity position worsens, and they must pay higher interest rates to retain funding. I explore how variations of Merton-type models can be used to measure bank risk,...

Starting from the Merton framework for firm defaults, we provide the analytics and robustness of the relationship between default correlations. We show that loans with higher default probabilities will not only have higher variances but also higher correlations between loans. As a consequence,...

Shipping markets irregularity due to high-level volatility of freight rates and asset prices increases the risk of banks’ invalid financial strategy. Risk is further increased due to the heterogeneous shipping market, despite the regulations set by the Basel Convention. Consistent with the...

An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes...

Within the Internal Ratings-Based (IRB) approach of Basel II it is assumed that idiosyncratic risk has been fully diversified away. The impact of undiversified idiosyncratic risk on portfolio Value-at-Risk can be quantified via a granularity adjustment (GA). We provide an analytic formula for...

We show that the saddle-point approximation method to quantify the impact of undiversified idiosyncratic risk in a credit portfolio is inappropriate in the presence of double default effects. Specifically, we prove that there does not exist an equivalent formula to the granularity adjustment,...

Regulators dedicate much attention to the option that financial institutions in distress have to transfer losses to their creditors. It is generally recognized that the existence of this option provides intermediaries with a powerful incentive to keep firm capital close to the minimal...