Gonna have to disagree with it being an important distinction.
In times where you can't liquidate assets at a high enough fraction of their "I deserve this much" value, then you can't meet your obligations and are thus insolvent as well. If someone's willing to buy your illiquid assets (or lend on the assumption that they're) at full "I deserve it" value, you were still insolvent -- you just got bailed out.
If you are otherwise profitable, then a long enough line of credit can return you to profitability. In that respect as well, an "insolvent" institution can become solvent thanks to this added liquidity.
For those reasons, I believe that in the interesting cases, liquidity and solvency are too deeply entangled to distinguish.
So when MtGox tries to keep the facade up long enough for trading fees to cover the shortfall, then yes, that is different from an "illiquid but solvent" bank getting a loan from the Lender of Last Resort ... but it's a different of degree, not kind (edit: fixed wording, thanks dllthomas). Both of them are trying to cover up functional insolvency with future profits they hope to operate long enough to get.
In times where you can't liquidate assets at a high enough fraction of their "I deserve this much" value, then you can't meet your obligations and are thus insolvent as well. If someone's willing to buy your illiquid assets (or lend on the assumption that they're) at full "I deserve it" value, you were still insolvent -- you just got bailed out.
If you are otherwise profitable, then a long enough line of credit can return you to profitability. In that respect as well, an "insolvent" institution can become solvent thanks to this added liquidity.
For those reasons, I believe that in the interesting cases, liquidity and solvency are too deeply entangled to distinguish.
So when MtGox tries to keep the facade up long enough for trading fees to cover the shortfall, then yes, that is different from an "illiquid but solvent" bank getting a loan from the Lender of Last Resort ... but it's a different of degree, not kind (edit: fixed wording, thanks dllthomas). Both of them are trying to cover up functional insolvency with future profits they hope to operate long enough to get.