Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 14: Q. 16 (page 352)

How can a bank end up with negative net worth?

Short Answer

Expert verified

The bank's worth goes negative when the highest number of borrowers does not repay the loan amount to the bank.

Step by step solution

01

Concept Introduction

When a bank will have liabilities worth more than the assets then that bank has a negative net worth. Negative net worth may occur when the number of defaulters is more than expected.

02

:Expalantion of solution

There are borrowers who do not repay their loan amount. When a bank has more loan defaulters than expected it will face a decline in its value and the worth of the bank goes negative since the liability will be more than the assets. Thus, the bank's worth goes negative when the highest number of borrowers does not repay the loan amount to the bank.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Why do we call a bank a financial intermediary?

Imagine that you are a barber in a world without

money. Explain why it would be tricky to obtain

groceries, clothing, and a place to live.

If you are out shopping for clothes and books, what is easiest and most convenient for you to spend: M1 or M2? Explain your answer.

If you take $100 out of your piggy bank and

deposit it in your checking account, how did M1

change? Did M2 change?

What do you think the Federal Reserve Bank did

to the reserve requirement during the 2008–2009 Great

Recession?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free