One point that’s not often (enough) made is that liquidity crises and insolvency are more similar than they are different. They’re distinguished by duration and certainty. If the value loss is KNOWN to be temporary, because the long-term securities are truly safe, and “temporary” is on the order of a few months to maybe a year (again, with guarantees of payout), then it’s liquidity. If it’s longer-term than that, or there’s a real chance that it’ll NEVER pay out in full, it’s solvency.
I second the recommendation of reading Matt Levine. https://www.bloomberg.com/opinion/authors/ARbTQlRLRjE/matthew-s-levine . Bloomburg subscription required to see back-issues, but you can subscribe to future ones for free.
One point that’s not often (enough) made is that liquidity crises and insolvency are more similar than they are different. They’re distinguished by duration and certainty. If the value loss is KNOWN to be temporary, because the long-term securities are truly safe, and “temporary” is on the order of a few months to maybe a year (again, with guarantees of payout), then it’s liquidity. If it’s longer-term than that, or there’s a real chance that it’ll NEVER pay out in full, it’s solvency.