Solvency Risk

Definition of solvency risk

Solvency risk is the risk that the debtor will be unable to pay it. It is the essential element of credit risk, the other risk being that which the debtor refuses to pay. 

The solvency risk was historically taken by the company which grants payment terms, within the framework of inter-company credit, and in loans by credit institutions, which had the responsibility and the privilege of intermediation.

In inter-company credit, it is the company that agrees the payment terms that takes charge of the credit risk.

Solvency risk management

When granting credit, the credit risk could be limited by guarantees, sureties and guarantees (personal or real)

Credit risk and remuneration

The credit risk is compensated by a margin which is added to the rent of the money.

Payment of debts due and suspension of payments

The cessation of payments by the debtor materializes the materialization of the credit risk. The law of companies in difficulty makes it a fundamental criterion of insolvency by limiting itself to payment on the agreed due date, without this necessarily means that the company is definitively unable to honor its obligations.

In the context of the issuance of financial instruments, the credit risk is assumed by the buyer of the security. Structured financing techniques seek to separate the debtor’s credit risk from that of the debt.

Risk assessment and company information

Legal information

To allow the business credit provider to assess the risk, the French legislator has developed legal information.

Company information

In addition, economic and financial information on the company is the subject of provision of information services making it possible to determine the company’s credit.

Rating agencies provide assessments of the debt issued by companies whose financial instruments they rate.

Credit risk management and credit insurance

The creditor can protect himself against the credit risk by the techniques of credit insurance.

Credit risk and financial instruments

The payment of the financial instrument traditionally involved a risk on the debtor. Structured financing techniques, through securitization mechanisms, aim to modify risk by separating the debtor’s risk from that of the debt. This unbundling can also result from the use of credit derivatives.