Question

A. Define and describe Insolvency Risk.

B. Describe the two best protections against insolvency at a Financial Institution.

C. Describe a situation where Insolvency Risk could be caused 1) by Liquidity Risk; 2) by Credit Risk.

(I want you to type the anwer)

Answer 1

(A) Financial risk have three sub-parts.These are Insolvency risk,liquidity risk and profitability risk. Insolvency risk is arise in situation when an individual or organization can no longer meet its financial obligations with its lender or lenders as debts become due. Insolvency can lead to insolvency proceedings, in which legal action will be taken against the insolvent enterprises.Insolvency risk can be arise due to less cash reserves and decreasing cash inflows or increasing cash outflows from the company.The degree of insolvency is measured by the relationship between the assets, liabilities and equity at a particular point in time.

(B) The two best protections against insolvency at a Financial Institutions are as follow:

(1) Bonds: Bonds are usually provided by bank, insurer and other financial institution who guarantees that it will pay for the losses incurred as a result of the as a result of insolvency.

(2) Guarantee: Generally, guarantee is given by group company for any project of the company ensuring that they wear any loss arise as a result of insolvency.

Hence, bonds and guarantee are best protections against insolvency at a Financial Institution.

(C) The situation where Insolvency risk could be caused by

(1) Liquidity risk: When a bank borrowers refuse to renew deposits or other borrowings. In this situation, lending institution can liquidate asset of borrowers to fulfill their losses.It is caused for Insovency for borrowers.

(2) Credit risk: Credit risk arise in the situation when money invested in loans does not get paid back to the lending institution and it is causing to be insolvent for the borrowers.