First, no individual bank can be deemed sound where significant systemic risks loom large: as we learned in 2008–9, even liquid and well-capitalised banks can be quickly cornered if funding markets seize up or asset prices plummet owing to fire sales.
Second, idiosyncratic bank failures are a matter of concern almost exclusively for systemic spillovers: a bank’s failure may or may not constitute a serious problem, depending on whether its counterparties can withstand its demise. Third, experience shows that big, well-diversified banks are largely sheltered from idiosyncratic shocks and can only become insolvent because of a systemic shock.