ByTopsy Sikalinda
Investrust explained in simple terms for ordinary people like us.
**1. Why would the Central Bank take over a bank for insolvency?**
When a bank becomes insolvent, it means that its liabilities exceed its assets, making it unable to meet its financial obligations. In such cases, the Central Bank may intervene to protect depositors’ funds and maintain stability in the financial system. By taking over the insolvent bank, the Central Bank aims to prevent a collapse that could have wider economic repercussions. The Central Bank may implement measures such as restructuring, recapitalization, or finding a suitable buyer to restore the bank’s financial health.
**2. Difference between insolvency and bankruptcy:**
– **Insolvency:** Insolvency refers to a financial state where a person, company, or institution is unable to pay its debts as they become due. In the case of a bank, insolvency means that its liabilities exceed its assets.
– **Bankruptcy:** Bankruptcy is a legal process initiated by an individual or entity that is unable to repay outstanding debts. It involves filing a petition in court to declare bankruptcy, and the court oversees the liquidation of assets to repay creditors. Bankruptcy is a legal declaration of insolvency, and it provides a structured process for resolving debts and distributing assets among creditors.
In simple terms, insolvency is the financial condition of being unable to pay debts, while bankruptcy is a legal process initiated to address insolvency through asset liquidation and debt repayment under court supervision.
