What Is Liquidity Risk?
All firms, particularly financial institutions, require access to borrowed funds to carry out their operations, from paying their near-term obligations to making long-term strategic investments. An inability to acquire such funding within a reasonable timeframe could place a firm at risk, as graphically shown by the recent demise of certain investment banks and other financial institutions. While such risks are endemic to financial institutions, increased financial globalization, the development of new financial instruments, and changing macroeconomic conditions have led to a renewed emphasis on the measurement and management of liquidity risk. In particular, the Basel Committee on Banking Supervision (BCBS) recently reviewed and expanded its survey of sound practices for liquidity risk management by both banking organizations and their supervisors. This Economic Letter reviews and highlights key elements of liquidity risk measurement and management. Definition Liquidity is generally d
