Principles of Macroeconomics / Unit 11 MAC 1011 worked example, 60 to 90 seconds
Building a T-Account and Testing Solvency
The idea
Build the balance sheet, compute net worth, and say whether the bank is solvent. Put assets on the left and liabilities on the right, total each side, and subtract. A bank is solvent while net worth is positive, and insolvent the moment it turns negative, because its liabilities then exceed everything it owns.
In practice
Take the course's bank: reserves 600, loans 3,900 and bonds 500, against deposits of 4,500, all in millions. Assets total 5,000. Liabilities are 4,500. Net worth is 500, and the bank is solvent. Now suppose borrowers holding 700 of those loans default and the loans are written off. Assets fall to 4,300 while deposits are unchanged at 4,500, so net worth is negative 200. The bank is insolvent. Note that deposits did not move: what failed was the asset side.
Where people slip
Net worth is computed, not held. There is no pot of money labelled net worth, which is why a bank can be insolvent while cash is still crossing the counter. Solvency and having cash on hand are different tests, and the next entries separate them.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Something wrong in this lesson? Flag it · Sources for Principles of Macroeconomics