I would like to talk about lessons one can learn from the recent developments in the crypto industry which was valued at €3 trillion at its peak (and since then has lost two-thirds of it).
In high finance, liquidity and solvency are two separate issues, and rightly so. Liquidity is very easy to understand. Imagine you took your date to a Michelin star and after the meal you realise you forgot your wallet (and no, you don’t have Revolut on your phone). You have cash in your bank account/under your pillow at home but not with you at the restaurant when you need it. You have run into a liquidity issue.
Now to solvency. Imagine, after realising you forgot your wallet, you take out a card hidden under your shoe sole (inspired by some 007 style thriller) and try paying for the dinner with it. To your horror, the limit on the card is below the bill amount. Now you are insolvent as far as the restaurant is concerned.
From a financial perspective these are two different kinds of crisis (as for the dating perspective you can safely assume this is your last date with your current date). However, what I have just explained is when a liquidity issue turns into a solvency issue.
Imagine a bank having €100 deposits (liability) and €70 worth of lending (assets). Let’s assume all debtors are top quality, backed by good finances. As is typical with banks, where they borrow short and lend long, there is a mismatch between when the liabilities can be called and when banks can get…
