Liquidity vs solvency problem
·1 min
- I learnt about a new idea while reading how FTX recently went bankrupt (within a short period of time).
- A liquidity problem happens when a bank’s assets are tied up in long-term assets but its customers, a lot or all of them, are demanding their money right now.
- The latter could happen if customers lose trust in the bank (i.e. bank run) or some other reason.
- One way to solve this through a central bank which literally has the power to print money on its free will: it steps in, uses bank’s collateral to lend money and charge interest and/or penalty.
- A solvency problem is when a bank, crypto exchange etc. just lost customer funds. For e.g., it invested in risky or volatile assets and those assets went bust.
- Possibly no way out except filing for bankruptcy because no one would want to loan money to such a company that doesn’t have any collateral or assets.
- FTX claimed it had an liquidity problem but more likely had a solvency one. It really fucked up.