IDEAS home Printed from https://ideas.repec.org/p/cbi/wpaper/2-rt-21.html
   My bibliography  Save this paper

Simulating business failures through the liquidity and solvency channels: a framework with applications to COVID-19

Author

Listed:
  • McCann, Fergal

    (Central Bank of Ireland)

  • Yao, Fang

    (Central Bank of Ireland)

Abstract

We develop a microsimulation model that can identify Small and Medium Enterprises (SMEs) as financially distressed due to their inability to meet short term losses with cash (liquidity distress) or to meet their debt repayments (solvency distress). We estimate that – on these metrics – around one-in-six Irish SMEs may have been financially distressed at the end of 2020, or 14 per cent when weighted by debt balances. The model can be used for policy assessment: we calibrate the model to fiscal support implemented in Ireland during the first three quarters of 2020 and estimate that it reduced the share of distressed SME debt by two-fifths. On targeting, we show that a hypothetical scheme selecting firms with the smallest losses first could reduce distress rates from 19 to 7 per cent – albeit we do not suggest this is the welfare-optimising approach. On policy design, we show that debt-based support schemes reduce distress rates by less than grants, and this is driven by the greater role played by solvency over liquidity concerns in a debt-based support regime.

Suggested Citation

  • McCann, Fergal & Yao, Fang, 2021. "Simulating business failures through the liquidity and solvency channels: a framework with applications to COVID-19," Research Technical Papers 2/RT/21, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:2/rt/21
    as

    Download full text from publisher

    File URL: https://www.centralbank.ie/docs/default-source/publications/research-technical-papers/02rt21simulating-business-failures-through-the-liquidity-and-solvency-channels-(mccann-and-yao).pdf?sfvrsn=5
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kren, Janez & Lawless, Martina & McGuinness, Gerard & O'Toole, Conor, 2022. "SME Financial Distress and the Macroeconomic Recovery: A Microsimulation Approach," Papers WP718, Economic and Social Research Institute (ESRI).

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cbi:wpaper:2/rt/21. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Fiona Farrelly (email available below). General contact details of provider: https://edirc.repec.org/data/cbigvie.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.