solvency

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Solvency ( Italian solvente , "expectorant"; from Latin solvere , "pay, pay off") or solvency is the ability of a business entity ( natural or legal person ), its liabilities when due to meet immediately or in the near future. The opposite is bankruptcy .

General

Creditworthiness , creditworthiness , liquidity or solvency are similar terms which, as technical terms in banking, specify the general term solvency. Solvency is equated with liquidity or solvency, as many cash to deploy in order to meet all payment promise. A general characteristic of adequate solvency is the presence of liquid funds ( stock of funds ) and their ability to be liquidated quickly and with as little loss as possible, i.e. sufficient liquidity. In the perfect capital market , the liquidity of an economic subject is the reflection of its solvency.

Solvency plays a role in particular in the case of long-term obligations ( leasing , rent , installment credit , insurance contract ) because the debtor's solvency must be guaranteed over a long period of time. Because of their central position in an economy, the legislature has created special regulations on the solvency of credit institutions and insurance companies . Equipping these companies with adequate equity capital is referred to as solvency.

Banking

The solvency of credit institutions depends on their risk-bearing capacity . From a banking point of view, it relates to adequate capital adequacy for the bank risks taken. A typical solvency risk arises, for example, from the rapid deterioration in the loan portfolio . The uninformed investors form their expectations about the solvency of the credit institutions by observing the behavior of the informed investors. Informed investors withdraw their savings as soon as they receive bad news about their bank. If the uninformed depositors observe this, they will interpret a queue in front of the bank counter as a signal of imminent bankruptcy and a bank run will ensue . The maximum burden theory established in 1959 therefore requires that the available own funds must be sufficient to cover possible liquidation losses. "The sum of the losses that have to be accepted in the event of such an early assignment of certain assets must never be greater than the equity".

In order to ensure adequate solvency, according to banking supervisors , when setting own funds requirements, attention should be paid to a risk- appropriate weighting of assets and off-balance sheet items . Too much credit concentration on a single borrower ( granularity ) or a group of connected customers ( cluster risk ) is seen as detrimental to the solvency of an institution. According to Art. 93 (1) Capital Adequacy Ordinance (CRR), an institution's own funds may not fall below the amount required as initial capital at the time of its approval in order to ensure solvency. In the case of stress tests , Art. 290 (7) CRR provides that when analyzing solvency under stress conditions, the shocks simulated for the underlying risk factors must be severe enough to capture extreme historical market conditions and extreme, but plausible, tense market conditions.

Insurance

In the insurance regulation is solvency II ( English solvency ) in § § 74 ff. VAG regulated. According to this, insurance companies have to compile a comparison of assets and liabilities for the purpose of determining the available own funds ( solvency overview ), whereby technical provisions may have to be created ( Section 75 (1) VAG). Insurance companies must always have eligible own funds at least in the amount of the solvency capital requirement. The solvency margin determines how much equity an insurance company must have.

Solvency ratios

Solvency is an important criterion for the rating of companies or countries , measured against economic indicators such as liquidity and debt indicators or the equity ratio . For private households , credit scoring is based on available bank balances or free overdraft facilities as well as the debt service coverage ratio .

literature

Individual evidence

  1. ↑ Solvency . In: Gabler Wirtschaftslexikon . Retrieved May 15, 2014.
  2. ↑ Willi Albers (Ed.), Handwörterbuch der Wirtschaftswwissenschaft , Volume 5, 1980, p. 50
  3. ↑ Wolfgang Stützel , Banking Policy Today and Tomorrow , 1983, Item 60a
  4. ↑ GBI Genios (Ed.), Topic Investment, Financing & Risk Management , 2015, p. 129
  5. ↑ Monika Lindner-Lehmann, Regulation and Control of Banks , 2001, p. 50 f.
  6. ↑ Wolfgang Stützel, Is the “golden banking rule” a suitable guideline for the business policy of credit institutions? , in: Lectures for Sparkasse Auditors, 1959, p. 43
  7. ↑ Jörg Freiherr Frank von Fürstenwerth / Alfons Weiss, VersicherungsAlphabet , 2001, p. 591