Since the financial crash the subject of screening for solvency or liquidity risk may seem to be a black art.

In a blog I found in Stockopedia's FAQs there are some possible pointers at least when dealing with lending organisations like banks for example.


Solvency analysis of Financials is difficult
The problems of creating a solvency test for financials that operate in real-time or relative real-time is not easy. It’s not hard to do after the fact, but at any one time, no one – not even the directors of the company really know what is embedded on the books at a financial. Société Générale, Barings, Northern Rock, Bear Stearns – the list of blowup surprises go on and on.

I have had some successes with a solvency risk test for lending institutions based on the following two characteristics:

Excessive lending growth as a sign of lending portfolio quality: In good economic times, a bank can produce earnings growth by growing its assets, or loan book. In the long run, not all banks can grow their loan books significantly in excess of GDP. High asset growth comes at a cost of lower asset quality.
Loan loss provisions as a measure of the current level of stress: Instead of the standard ratio of loan loss provisions to total assets, I like to use loan loss provisions to assets three years ago. It’s not the loans that you make today that go sour, it’s the ones that you made two or three years ago that tend to get into trouble.

These words also explain why the Altman Z -Score is not relevant to financial sector shares.

But not all financials are banks.

Some financials are holding companies that are vehicles of smaller growth companies, for example.

Others might be collective property companies, REITS or insurance or re-insurance companies.

So with the collection of screenable ratios available on Stockopedia.

Which ratio or ratio vs. ratio are relevant to determining the liquidity or solvency risks of financial stocks?

Am using the Current ratio to determine liquidity but with the prevalence of opacity within this sector.

Does  this make the use of this ratio futile or futile within certain sections of it?

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