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suppose that a bank has loaned money to two businesses: a trustworthy computer manufacturer and a risky mining venture. unfortunately, the mining venture fails, and the mining firm goes bankrupt. the bank has no insurance for this situation. now, on its balance sheet, the bank has more liabilities than assets. what is this situation called, and what is the result of this situation? fire sale. the available assets of the bank are sold for pennies on the dollar. illiquidity. shares of the bank are not traded as often on a stock exchange. insolvency. the bank cannot pay back depositors. bank run. depositors run on the bank to cash out before the bank runs out of money. consumption. the money that was lost has no effect on the bank's operating status, but the firm's loss counts as part of gdp.

Sagot :

Insolvency. The bank is unable to repay depositors.

Explain the term "insolvency."

Insolvency occurs when a company or bank is unable to pay its debts with the funds available to it. In other words, banks or businesses become insolvent when their assets are insufficient to cover their commitments. It's crucial to understand that insolvency does not always entail bankruptcy. It can result in insolvency procedures, in which legal action is conducted against the insolvent individual or company and assets are liquidated to repay outstanding debts. In the example above, the bank's liabilities exceed its assets. This is why the bank is insolvent, as its assets are insufficient to cover its liabilities. In other words, they are unable to repay their depositors.

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