Insolvency risk is reduced when the leverage of an FI is also reduced.

Question

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Insolvency risk refers to the risk that an FI might not be able to meet its financial obligations. Leverage is the extent to which an FI relies on borrowed funds (debt) to finance its operations. When an FI has high leverage, it is more vulnerable to insolvency risk as it has a higher debt burden to service. Therefore, reducing leverage can reduce insolvency risk.

Insolvency Risk Is Reduced When the Leverage of an FI