An illiquid bank can become insolvent when it:
A) refuses to make promised payments.
B) sells additional stock to obtain funds.
C) sells assets at fire-sale prices to meet liquidity demands.
D) can extend the due dates of its liabilities.

Question

Quizplus · Accepted Answer

An illiquid bank may be forced to sell assets quickly at lower prices to meet its liquidity demands. This can decrease the bank's overall financial health and potentially lead to insolvency. Refusal to make promised payments (A) may be a result of illiquidity, but it is not the cause. Selling additional stock (B) may provide additional funds, but it will not address the underlying liquidity issue. Extending the due dates of liabilities (D) can only provide temporary relief and may not be a sustainable solution for an illiquid bank.

An Illiquid Bank Can Become Insolvent When It