Solvency Theory

A bank is solvent when its assets are more or equal to its liabilities. To expand business and survive successfully in the era of modern competitive business environment commercial bank must be solvent. For this reason, commercial banks must have sufficient own/equity capital. If commercial banks are insolvent it will not be able to achieve confidence of people.

Solvency in case of bank is viewed in two aspects;

Actual solvency-if firm dissolves today whether the net realization value of assets equals with net liabilities.

 Technical solvency-whether at any point of time firm can pay a specific liability. Loss of technical solvency the following ration analysis is done:

  • Current ratio
  • Quick ration
  • Net working capital
Share it:  Cite

More from this Section

  • Extra expense coverage form
    Extra expense coverage form is a separate form that can be used to cover the extra expenses ...
  • Traditional net cost method
    Traditional net cost method is a method of determining cost to an insured of a life insurance ...
  • Target financing rate
    Target financing rate is the European Central Bank’s target for the overnight cash rate, ...
  • Fixed Rate
    Fixed Rate is a predetermined rate of interest applied to the principal of a loan or credit ...
  • Commercial paper market
    Commercial paper market is the market where short-term notes with maturities ranging from ...