Solvency describes the ability of a bank to meet its obligations from deposits and other liabilities to customers and investors.
An important factor here is the adequate equity capital in relation to the risks taken in order to be able to cushion potential losses. A capital ratio that is too low in relation to the risks can lead to the insolvency of a bank and thus also have an impact on the financial system as a whole.
Solvency regulations serve to oblige banks to have adequate capital resources and thus ensure the stability of the financial system. The regulatory authorities set minimum requirements for the banks' equity capital and regularly check whether these requirements are met. Compliance with solvency requirements is thus an important prerequisite for the business activities of banks.
Various ratios are used to measure solvency, such as the equity ratio, the total capital ratio or the risk-weighted equity ratio. These ratios provide information on how well a bank is able to service its liabilities and bear potential losses.
The concept of solvency has become increasingly important in recent years, especially with the introduction of new regulatory requirements such as Basel II and Basel III, which set even stricter capital adequacy requirements for banks and aim to further increase the stability of the financial system.
