Tom Hanna's Lifestream

Nick Rowe presents a very simple example to demonstrate how a commercial bank might appear to be insolvent when you look at its balance sheet, but could still have a sizable net worth:I start a bank. I have zero capital. I borrow $100 and lend $100. What is the net worth of my bank? Looking at the balance sheet, the answer is simple and obvious: assets $100, liabilities $100, net worth = assets minus liabilities = $0. But looking at the income statement we may get a very different answer. If I borrow at 3%, lend at 5%, and have no administrative costs, my bank earns $2 profit per year, which discounted at 5% gives a Net Present Value of $40, so my bank is worth $40. So if the bank still has a positive net worth from an income statement perspective, what is to keep other investors from bidding for its assets if it becomes balance-sheet insolvent? To what extent does the market adapt to the realities of discounting the expected net revenues on the income-statement?Is the problem with balance-sheet insolvency more of a regulatory problem? Or are we actually observing serious cases of income-statement insolvency in some/many financial institutions, especially in the US?