Question

You are leading a discussion with bank interns on the closure of the SME bank Namibia. You go over the issues associated with liquidity and bank failure. One intern asks if the closure was driven by bank failure or bank insolvency. What is the difference between the two? [2]
(a) Insolvency is a bank’s inability to pay its employees and is forced into receivership, whereas a bank failure is an event where depositors lose a significant amount of cash on hand.

(b) Insolvency is when a central bank or lender of last resort steps in to bail out an institution. A bank failure is the event where there is no lender of last resort.

(c) Bank insolvency is just like any insolvency when liabilities exceed assets. A bank failure is the collapse of the bank with significant loss to depositors and creditors.

(d) Insolvency is the event that triggers Securities Investor Protection Corporation (SIPC) protection of depositor balances, and a failure is when that depositor insurance is insufficient to cover all depositors.

Answer 1

C is the correct answer. Insolvency occurs when liabilities exceed assets. Failure is when significant losses to depositors and creditors occurs.