Question

     You are a bank regulator working for the Federal Reserve. It is your job to see whether banks are solvent or insolvent, liquid or illiquid. Find the net worth of each bank below and fit them into one of the following four categories. Briefly explain your answers.

I.Liquid and Solvent (best).

II.Illiquid and solvent (probably needs short-term loans from other banks or from the Fed).

III.Liquid but insolvent (should be shut down immediately; could fool people for a while if not for your good efforts).

Illiquid and insolvent (should be shut down immediately

Bank of DelMarVa
Short-term Assets	Short-term Liabilities
$10 million	$6 million
Total Assets	Total Liabilities
$40 million	$50 million

Bank of Escondido
Short-term Assets	Short-term Liabilities
$6 million	$10 million
Total Assets	Total Liabilities
$50 million	$40 million

Bank of Previa
Short-term Assets	Short-term Liabilities
$12 million	$10 million
Total Assets	Total Liabilities
$50 million	$40 million

Bank of Cambria
Short-term Assets	Short-term Liabilities
$8 million	$10 million
Total Assets	Total Liabilities
$30 million	$40 million

Bank of Marshall
Short-term Assets	Short-term Liabilities
$120 million	$100 million
Total Assets	Total Liabilities
$500 million	$400 million

Answer 1

Short term Net worth (NW) = Short term assets - Short term liabilities

Long term NW = Long term assets - Long term liabilities

(A) Bank of DelMerVa - Liquid, Insolvent

Short term NW ($M) = 10 - 6 = 4

Long term NW ($M) = 40 - 50 = -10

Since Short term NW > 0, bank is liquid. Since Long term NW < 0, bank is insolvent.

(B) Bank of EsconDido - Illiquid, Solvent

Short term NW ($M) = 6 - 10 = - 4

Long term NW ($M) = 50 - 40 = 10

Since Short term NW < 0, bank is illiquid. Since Long term NW > 0, bank is solvent.

(C) Bank of Previa - Liquid, Solvent

Short term NW ($M) = 12 - 10 = 2

Long term NW ($M) = 50 - 40 = 10

Since Short term NW > 0, bank is liquid. Since Long term NW > 0, bank is solvent.

(D) Bank of Cambria - Illiquid, Insolvent

Short term NW ($M) = 8 - 10 = - 2

Long term NW ($M) = 30 - 40 = -10

Since Short term NW < 0, bank is illiquid. Since Long term NW < 0, bank is insolvent.

(E) Bank of Marshall - Liquid, Solvent

Short term NW ($M) = 120 - 100 = 20

Long term NW ($M) = 500 - 400 = 100

Since Short term NW > 0, bank is liquid. Since Long term NW > 0, bank is solvent.