So why doesn't Double Entry Book keeping prevent banks and individuals from going Broke.....
There is nothing wrong with people or entities going broke. It's a natural process in our system. Someone gets into difficulty, they enter bankruptcy, the debts get written off or written down depending on which bankruptcy path they take, and in due course they exit bankruptcy.
The same for banks, but the problem governments have with banks is that if a major bank fails the people who suffer are the banks customers, and anyone relying on the interbank money transfer system, and that's pretty much all of us, and a government's responsibility is to look after the citizens, so allowing a bank to fail is contrary to it's political and social objectives. It's against the national interests.
A government then has to look at what the bank needs, which might be minimal short term assistance, or if it's in serious trouble the bank may have to be nationalised or merged with a stronger bank as many were here and overseas during the GFC.
Take risks - if you win you will become wealthy, if you lose you will become wise
So why doesn't Double Entry Book keeping prevent banks and individuals from going Broke.....
If *your* personal credits and debts match exactly all the time, then yes that does prevent you from going bankrupt! In fact personally even if your debts are > your credits you are still not "bankrupt" as long as you have income / the capacity to make contracted repayments of your debts.
You would think also that a bank can go broke because they do not have enough funds (central bank exchange settlement account balance) to meet their daily net payment settlement obligations. Of course in the case of a shortfall, a licensed bank can simply go to the overnight cash/repo market and borrow any shortfall in ESA funds overnight at the RBA target cash rate - and if the system as a whole is short of funds then the RBA will inject as much new money as required to make up the shortfall. So technically even being short on required ESA balance will not send a licensed bank "broke" - as long as they maintain the required capital ratios to be considered solvent and to support their overnight borrowing / repo agreements. This is what makes banks "special" and why they are heavily regulated. Ie, to stop them abusing this privileged position, banks are *required* to keep those defined levels of capital available at all times, based on a ratio of their loan assets - if they fall below the minimum capital requirements, then they *are* insolvent (or broke), and must cease trading, and appropriate actions will be taken by the regulators, RBA etc.
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