For a bank, being means that are insolvent cannot repay its depositors, because its liabilities are higher than its assets. The end result that the bank has if it becomes insolvent is dependent upon the option of deposit insurance coverage.
An insolvent bank would not be able to repay people deposits in full in a country without deposit insurance. In the case of an insolvency depositors will have to queue up along with other bank creditors to reclaim whatever cash they might through the bank. Therefore for every Ј1.00 the bank owed to customers it could only even pay 90p or less.
Nevertheless, it is not the end regarding the tale. The failure of just one bank could lead visitors to be worried about the position that is financial of banking institutions. Moreover the bank that is insolvent have undoubtedly owed cash with other banking institutions, because would its clients. This could result in a domino impact – a bankruptcy at one bank can cause a ‘cascade’ of defaults, bank runs and insolvencies as individuals panic.
A proven way a bank can quickly raise funds in the eventuality of a bank run would be to offer assets. Nonetheless, if ‘distressed attempting to sell’ occurs on a sizable scale that is enough can lead to a financial obligation deflation. (suite…)