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What’s the difference between a liquidity crisis and a solvency crisis? When Lehman Brothers went under,...

What’s the difference between a liquidity crisis and a solvency crisis? When Lehman Brothers went under, its debts (liabilities) were much greater than its assets. Did Lehman Brothers experience a solvency or a liquidity issue?

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Liquidity crisis in terms of banks or a firm is a situation when the bank or the firm has less amount of cash available in order to perform its normal business functions etc. However, when the bank or the firm is going through a liquidity crisis it still has more assets than its debts, however the assets are in non-liquid form and it may take longer for the bank to liquidify its assets.

A firm or a financial institution such as a bank is going through solvency crisis when its debts are more than its assets which means even after selling all its assets, it may not be able to pay all its debts.

Since Lehman Brothers had its debts much greater than its assets, we can say that the bank experienced a solvency crisis.

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