Question

How can a bank end up with negative net worth?

Short answer

The bank's worth goes negative when the highest number of borrowers does not repay the loan amount to the bank.

Step-by-step solution

Concept Introduction

When a bank will have liabilities worth more than the assets then that bank has a negative net worth. Negative net worth may occur when the number of defaulters is more than expected.

Explanation

There are borrowers who do not repay their loan amount. When a bank has more loan defaulters than expected it will face a decline in its value and the worth of the bank goes negative since the liability will be more than the assets. Thus, the bank's worth goes negative when the highest number of borrowers does not repay the loan amount to the bank.