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Fractional Reserve Banking and Insolvency
You bet if it was so simple. This is when financial acumen comes into its true form. The bank would never ever want to go insolvent. What it does is, take insurance against the borrower defaulting.  Remember the financial crisis of 2008 which was the outcome of borrowers defaulting. The banks had created derivatives based on the loans distributed. CDO, CDS are some of the simple derivatives banks sell to cover their backs in case of defaults. There are derivatives using these derivatives as underlyings which they then sold it across to other buyers including other banks. Google for Fabrice Tourre and you would realise how much deep the banks go to save themselves from defaulters. If everything fails then go to the government for help. That was what happened when the US government doled out $600 billion to save the financial sector.