Question

Banks fail when the value of bank ________ falls below the value of ________, causing the bank to become insolvent.

A. loans; secondary reserves

B. income; expenses

C. assets; liabilities

D. reserves; required reserves

Answer 1

C. assets; liabilities

Step-by-step explanation:

The banks assets are mostly the money that they have loaned out to other people and expect to receive at a later date. And their liabilities are mostly the deposits that their customers have placed with them. When people who owe money to the bank default, the bank has to write that down as a bad debt and because of this their assets decrease, when the assets of a bank decrease to a point that assets are less than liabilities it means that the bank wont have enough money to pay back its depositors when needed because the money that they have to receive from their debtors is less than the money that they have to pay back to their depositors and this makes the bank insolvent.