Solvency as a requirement for emergency liquidity support

What it contains

FSI Brief No 29 starts from the fact that central banks act as lenders of last resort and that the 2023 banking turmoil confirmed the importance of liquidity support in times of stress. Subsequent analyses focused on supervisory effectiveness, liquidity regulation and operational preparedness, while a precondition of every loan, that the recipient be solvent, received comparatively little attention.

That condition raises two difficulties: in distressed markets it can be doubtful whether a specific institution is in fact solvent, and there is no universally accepted definition of solvency. The paper compares how seven jurisdictions define and determine solvency as a condition for receiving support in times of stress, and it is limited to the concept of solvency: it does not analyze eligible collateral, tenors, pricing or interest.

Its conclusions: most central banks require solvency, also for emergency support; in all jurisdictions the concept broadly considers the institution’s capacity to meet its obligations, but approaches differ depending on whether they focus on a snapshot of the balance sheet or on a general, forward-looking assessment of viability. In principle, the forward-looking assessment for liquidity support should be consistent with the one made to decide whether an institution is failing or likely to fail for resolution purposes, which calls for close coordination among central banks, supervisors and resolution authorities. And a certain degree of ambiguity is inevitable and can give authorities flexibility in times of stress.

Summary prepared by the Dominican Republic Risk Management Club from a reading of the original document, with the source verified on 7 October 2026. It does not replace reading the official text and is not advice.

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