PLEASE ONLY FINANCE EXPERT ANSWER THIS QUESTION. THIS MUST BE CORRECT AND PERFEC

Question

PLEASE ONLY FINANCE EXPERT ANSWER THIS QUESTION. THIS MUST BE CORRECT AND PERFECT!!

PLEASE DO NOT COMBINE THE ANSWERS INTO ONE PARAGRAPH, ANSWERS OF A, B, AND C SHOULD BE SEPARATED. DO NOT ANSWER THIS WITH YOUR HANDWRITING, PLEASE TYPE ON YOUR COMPUTER!!

THANK YOU!!

A. Define and describe Insolvency Risk.   

B. Describe the two best protections against insolvency at a Financial Institution.      

C. Describe a situation where Insolvency Risk could be caused 1) by Liquidity Risk; 2) by Credit Risk.

Explanation / Answer

A) Insolvency Risk:

Insolvency is a situation in which, when an organization/individual, can no longer meet its financial obligations with its lender or lenders.Insolvency occurs when equity becomes zero or negative.

B)

One of the best protections against insolvency is equity capital. The more equity a financial institution has the lower the insolvency risk.

The second best protection is prudent management.Managers at the financial instituttion should determine how much risk can the company digest. If it is optimum level then the company's health is secure.

c)

Liquidity risk can cause insolvency when a bank's creditors doesn’t renew deposits or other borrowings, this may force the bank to have to liquidate assets at any price. Any price here probably will be lesser price.Hence the loss in value of the assets sold would reduce equity and could cause insolvency.

Credit risk occurs when money invested in loans or securities is not paid back to the lending institution. These losses reduce equity capital and can lead to insolvency.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.