Commentary
Putting aside fraud or criminal activity, banks typically fail in one of two ways: either through insolvency or illiquidity (or both). Insolvency occurs when the bank doesn’t have enough assets to cover its liabilities. Insolvency tends to emerge gradually; for example, when it develops from deteriorating “main street” economic conditions. On the other hand, illiquidity leads to insolvency much more quickly. Illiquidity results when the bank doesn’t have enough cash on hand to meet its customers’ demands for it, and this can occur rapidly. Deposit runs are one of the main ways a bank can suddenly find itself in a liquidity crisis, which eventually spirals into insolvency….