After insolvency as well as the importance of deposit insurance coverage

For the bank, being means that are insolvent cannot repay its depositors, because its liabilities are higher than its assets. The end result that the bank has if it becomes insolvent is dependent upon the option of deposit insurance coverage.

An insolvent bank would not be able to repay people deposits in full in a country without deposit insurance. In the eventuality of an insolvency depositors will have to queue up along with other bank creditors to reclaim whatever cash they might through the bank. Therefore for every Ј1.00 the bank owed to customers it could just spend 90p or also less.

But, this is simply not the final end of this tale. The failure of just one bank could lead individuals to be worried about the budget of other banking institutions. Additionally the insolvent bank would have undoubtedly owed cash to many other banking institutions, as would its clients. This could result in a domino impact – a bankruptcy at one bank may cause a ‘cascade’ of defaults, bank runs and insolvencies as individuals panic. (more…)

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