solvency
SOL-vuhn-see
/ˈsɒl.vən.si/
The ability of a bank or enterprise to meet its long-term financial obligations.
Pertains to overall financial structural balance (assets exceeding liabilities) over long horizons.
The story behind the word. From Latin solvere, meaning to unbind or solve. Paying off debts unbinds a debtor from legal contracts, making them solvent.
Word relationships
- financial stability: Financial stability describes overall market conditions; solvency is an individual institution's balance sheet health.
- insolvency: Insolvency means liabilities exceed total assets, leading toward bankruptcy.
Commonly confused with
- liquidity: Solvency is about net worth and total assets; liquidity is about immediate cash availability.
Word family
- solvent (adjective): Able to pay all debts.
- insolvent (adjective): Unable to pay debts.
Collocations
- solvency ratio
- ensure solvency
- long-term solvency
- solvency test
Example sentences
- "Regulators conducted stress tests to confirm the solvency of commercial banks during economic downturns." Regulatory audit
- "Rising non-performing loans raised serious concerns regarding the financial institution's long-term solvency." Corporate restructuring
Memory hook
SOLVENT clears and DISSOLVES debt obligations completely. Dissolving debt to stay safe.
When not to use
Do not use to describe short-term cash flow issues when total assets are adequate (that is liquidity).
Fun facts
- Lehman Brothers had liquidity issues first, which rapidly uncovered deeper solvency issues in 2008.
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