Final answer:
Banks go bankrupt when liabilities exceed assets, leading to negative net worth and the need to declare bankruptcy to pay back creditors. Factors such as bad loans and economic crises can trigger such events, affecting the wider economy and various stakeholders.
Step-by-step explanation:
When discussing how a bank goes bankrupt, we refer to a situation where a bank's overall financial health is in jeopardy, and its liabilities exceed its assets. This condition is known as negative net worth. Banks can arrive at this critical point for several reasons, such as poor management, insufficient capital to cover loans that have gone bad, or significant declines in the value of their assets. When a bank is unable to rectify this imbalance, it may be required to declare bankruptcy. In such cases, the bank must sell off assets to pay back its creditors as much as possible. This process is a legal one, overseen by courts and follows specific regulations, such as Chapter 11 or Chapter 7 in the United States, depending on the details of the bankruptcy.Bankruptcy can have a ripple effect across the economy. For example, if a corporate bond issuer is unable to make due payments to bondholders, those holders can force the company to sell off its assets in order to repay them, leading potentially to the company's bankruptcy. In the broader historical context, economic crises, like the one in 2007, have led to decreased property values and subsequent defaults on mortgages. This drag on the economy can stretch to affect municipalities, some of which may also file for bankruptcy, as seen with Detroit in 2013.Conclusion Ultimately, a bank declaring bankruptcy is a sign of serious financial distress, and although it may not happen frequently, it can have significant implications for the economy at large and for the investors, borrowers, and employees connected to the institution.