Question

Suppose that a bank has loaned money to two businesses: a trustworthy computer manufacturer and a risky mining venture. Unfortunately, the mining venture fails, and the mining firm goes bankrupt. The bank has no insurance for this situation. Now, on its balance sheet, the bank has more liabilities than assets. What is this situation called, and what is the result of this situation? Bank run. Depositors run on the bank to cash out before the bank runs out of money. Illiquidity. Shares of the bank are not traded as often on a stock exchange. Fire sale. The available assets of the bank are sold for pennies on the dollar. Insolvency. The bank cannot pay back depositors. Consumption. The money that was lost has no effect on the bank's operating status, but the firm's loss counts as part of GDP.

Answer 1

Answer:

The situation is called insolvency. insolvency is refer to the situation when debtor is unable return its debt.  The same is happened in the given situation. In the above case due to not paid by manufacturing unit, bank is unable to pay to depositor.

Insolvency is refer to that critical condition when debtor unable to pay amount to depositor. In the above given case even if bank want to sell its all assets it cannot cover its liabilities.Explanation: