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I'm not sure i understand the difference here between "a liquidity crisis" and bankruptcy. people want to withdraw their deposits made at low interest rates and
by ouid 4y ago
I'm not sure i understand the difference here between "a liquidity crisis" and bankruptcy. people want to withdraw their deposits made at low interest rates and invest them with better yields.
The banks have misrepresented their ability to pay out the current deposits.
- jefftk 4y agoIt's a claim about what would happen given more time. Imagine I owe you a million dollars in cash, and also own a house that is probably worth about $1.5M. Houses are not very liquid: each transaction takes a lot of slow evaluation, you need to find the right person, etc. Best case for turning it into cash at close to its value is about a month, often takes a few months. So if I suddenly needed to pay back my loan to you we could say I'm in a liquidity crisis: given time to liquidate I'm good for it (my net worth is positive) but I don't have the cash on hand now. On the other hand, if the house is actually only worth $750k, then my issue is solvency. Even taking time to sell the house for as much as possible I won't have enough to pay everything I owe, and will need to go into bankruptcy. And we don't know for sure until I actually try hard to sell the house. People running into issues of solvency often say that they are running into a liquidity issue, however, through some mix of wishful thinking, hoping for self-fulfilling prophecies, and lying.
- grey-area 4y agoNo bank in the world could pay out all its deposits immediately.