What is the difference between a banks liquidity and its solvency?

What is the difference between a bank's liquidity and its solvency Introduction: The Essence of Stability Hello everyone! In the realm of banking, stability is paramount. It ensures that financial institutions can fulfill their obligations and maintain trust. Two key elements that contribute to this stability are liquidity and solvency. While they may seem similar, they address different aspects of a bank's operations. Defining Liquidity: The Ability to Meet Short-Term Obligations Liquidity, in simple terms, refers to a bank's ability to convert its assets into cash quickly. It is the measure of how easily a bank can meet its short-term financial obligations, such as customer withdrawals or payments. A bank with high liquidity has ample cash or assets that can be readily converted, ensuring smooth operations even in times of increased demand or unforeseen circumstances. Solvency: The Long-Term Financial Health While liquidity focuses on short-term obligations, solvency delves into the long-term financial health of a bank. Solvency is the measure of a bank's ability to meet its long-term liabilities, such as loans or debts. It assesses whether a bank's assets, both liquid and illiquid, are sufficient to cover its long-term obligations. A bank that is solvent has a strong capital base and is considered financially stable.