Balance Sheet Insolvency occurs when Liabilities are greater than the Assets resulting in negative capital equity. (In other words, the Equity Capital account has gone to zero or negative.) For a Financial Institution, Insolvency Risk can be defined as the risk that there is insufficient capital to offset either a decrease in the market value of assets relative to liabilities or an increase in liabilities relative to the market value of assets.

A. Describe a situation where Insolvency Risk could be caused one of the many risks that a Financial Institution may face.

B. Describe the best protection against insolvency Risk at a Financial Institution.