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For banks, it comes down to the balance sheet. Most of the assets of a bank are in the form of loans it holds (mortgages, car loans). They are assets for the bank because they generate income (they are liabilities to the people that owe the bank money). The liabilities of the bank are largely in the deposits people and businesses keep in bank accounts. They're liabilities because the bank owes that money to the depositors, along with interest payments.
In the day to day operation of a bank, only a small fraction of the depositors' money actually needs to be paid to them. The cash flow from loan payments, new deposits, and the bank's reserves is typically sufficient to cover these needs.
In theory, a bank should be able to cover *all* its deposits by selling off all its assets (the loans). If the loans become bad ("toxic") their value, plus the bank's other capital reserves, might not be enough to cover the liabilities to the depositors. In that case, the bank is technically insolvent, even though it may be able to function with its existing cash flow.
If you want to understand the current financial crisis, I recommend (again) the excellent Planet Money podcast from NPR, and the episodes of This American Life that the Planet Money folks also produced. This episode of TAL, in particular, explains bank balance sheets:
http://www.thisamericanlife.org/radio_episode.aspx?episode=375
In the day to day operation of a bank, only a small fraction of the depositors' money actually needs to be paid to them. The cash flow from loan payments, new deposits, and the bank's reserves is typically sufficient to cover these needs.
In theory, a bank should be able to cover *all* its deposits by selling off all its assets (the loans). If the loans become bad ("toxic") their value, plus the bank's other capital reserves, might not be enough to cover the liabilities to the depositors. In that case, the bank is technically insolvent, even though it may be able to function with its existing cash flow.
If you want to understand the current financial crisis, I recommend (again) the excellent Planet Money podcast from NPR, and the episodes of This American Life that the Planet Money folks also produced. This episode of TAL, in particular, explains bank balance sheets:
http://www.thisamericanlife.org/radio_episode.aspx?episode=375
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