Solvency

Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness.
Annual income twenty pounds, annual expenditure twenty pounds ought and six,
result misery. (Charles Dickens, David Copperfield)
A financial institution is defined as being solvent if it is able to meet its (payment)
obligations; consequently it is insolvent if it is not able to meet them. Insolvency ‘in
the first degree’ basically means ‘not having enough money’ but even if the liquid
assets seem to properly cover the liabilities, insolvency can stem from various
technical reasons:
Ω Insolvency in time – incoming payments on central bank accounts do not arrive
in time, so there is not enough coverage to initiate outgoing payments
Ω Insolvency in a particular currency – this can occur by simple FX cash mismanagement:
the institution is unexpectedly long in one currency and short in another;
but it could also be the result of an inability to buy the short currency, due to
exchange restrictions etc.
Ω Insolvency in a payment system – even if there is enough central bank money in
one payment system to cover the shortage in another payment system (in the
same currency) both may not necessarily be netted.
In practice, of course, it makes a big difference if a FI is insolvent in the first degree
or ‘only’ technically. ‘Friendly’ institutions will have good economic reasons to ‘help
out’ with funds; or central banks might act as lenders of last resort and thus bring
back the FI into the status of solvency. Nevertheless it is very hard to differentiate
consistently between those grades of insolvency. Concentrating on the end of a
payment day makes things clear: the FI is either solvent or not (by whatever means
and transactions), tertium non datur. In such a digital system it does not make sense
to distinguish between ‘very’ and ‘just’ solvent, a differentiation we want to make for
grades of liquidity.
Being only ‘generally liquid’ could mean having the required funds available later,
in another currency or another place or payment system or nostro account. In any
case, they are not available where and when they are required – a third party is
needed to help out.