Question

If you owned a bank, would you rather that it be (a) illiquid, or (b) insolvent? Explain your answer.

Answer 1

I would rather have an illiquid bank than an insolvent one. While an illiquid bank may face short-term liquidity issues, it can still recover and repay its debts over time. On the other hand, an insolvent bank is unable to meet its long-term financial obligations, which could ultimately lead to bankruptcy and closure.