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

  • Transfer risk
    Transfer risk is defined as limitation on the MNEs ability to transfer funds into and ...
  • Tender Bond / Guarantee
    Tender Bond / Guarantee is a guarantee provided by a company responding to an international ...
  • Risk structure of interest rates
    Risk structure of interest rates is the relationship among the interest rates on various ...
  • Reinsurance facility
    Reinsurance facility refers pool for placing high-risk automobile drivers that arranges ...
  • Mutual savings bank
    Mutual savings bank is a thrift institution that accepts time deposits and lends them ...