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Suppose a bank has an equity ratio (ER) of 15 percent and assets totaling $100. What...

Suppose a bank has an equity ratio (ER) of 15 percent and assets totaling $100. What level of loan writeoffs would make the bank go insolvent? What does it mean for a bank to go insolvent?

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Answer #1

It is reflecting that if the bank will be having an equity ratio of 15%, then it will have the debt ratio of 85% and when the total Assets of the company is 100 then, if the total Assets of the company fall by just 16, then it will have its total assets lower than the total debt.

When the write off of the loan will be happening of more than $15 than the overall debt of the company will be higher than the Assets of the company and in that case the company will be fearing of triggering of an insolvency.

when the insolvency of the bank has been triggered it will mean that the overall assets are not enough in order to pay the overall liability of the bank and it will have a risk related to winding up for the company because it will lead to selling off the Asset in order to dispose off the creditors.

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