Asset quality refers to the assessment of a financial institution's assets, particularly loans and investments, to determine their risk of default. High asset quality indicates that a bank's loans are likely to be repaid, while low asset quality suggests a higher risk of non-payment. This evaluation is crucial for understanding the overall health of a bank and its ability to generate profits. Factors influencing asset quality include the creditworthiness of borrowers, economic conditions, and the effectiveness of the bank's lending practices. Regulators often monitor asset quality to ensure that institutions like banks maintain sufficient capital reserves and manage risks effectively, safeguarding the financial system.