Definition Of

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
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