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That's exactly what I'm saying.
Ultimately regulator/government make the rules about the amount of reserve assets banks must have in relation to liabilities, taking liquidity and risk into account (see 'capital tiers') and so they determine if 'outstripping' and thus failure has occurred, by monitoring and testing.
In general in 2008, UK banks had profitable retail businesses swamped by disastrous investment businesses - they were not sufficiently separated ('ring-fenced').
chez_jay
Yeah, I just realised I was talking bollocks when I suggested equity would be zero when share price was zero.
Does having liquidity problems doesn't necessarily mean that liabilities outstrip assets? In your example of a company facing insolvency because of cash flow problems, isnt it possible for the company have a healthy balance sheet, and even be profitable, but cannot get their hands on cash (because credit problems or whatever). Which is sort of what happened to Northern Rock.