Liquidity risk: Difference between revisions

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(Added link to The Treasurers Handbook - Guide to risk managment)
imported>Doug Williamson
(Align with Guide to risk management and Liquidity pages, and Certificate in Treasury material.)
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Liquidity is access to cash, and liquidity risk revolves around fluctuations in the ability to access cash when it is needed.  
Liquidity risk has a number of important dimensions for the corporate treasurer. These include the corporate organisation as a whole, individual investments, and the wider markets for borrowing and lending.
It is very difficult to find a universally accepted definition of liquidity risk.  


However, it is commonly accepted that liquidity risk comes in two forms: i. Funding liquidity risk and ii. Market liquidity risk.
#For an organisation, liquidity risk is the risk that the organisation ceases to have access to the cash it needs in order to meet its financial obligations as they fall due. This can arise from a number of different causes, both internal and external to the organisation.
 
#For an individual investment, liquidity risk is the risk that the investment cannot be turned into cash quickly and without significant loss in value.
:i. Funding liquidity risk is defined as a company’s inability to obtain funds to meet cashflow obligations.
#Liquidity risk at the market level includes the drying up of borrowing markets, disrupting the financing of individual organisations.
 
:ii. Market liquidity risk refers to the risk that market transactions will become impossible due to market disruptions or inadequate market depth.
 
The two forms cross over however. 
 
For example if commercial paper or bond markets dry up that is market risk, which will immediately become funding risk if the borrower has insufficient committed bank facilities to act as a stop gap.




== See also ==
== See also ==
* [[Cash]]
* [[Cash]]
* [[Documentation risk]]
* [[Funding liquidity risk]]
* [[Liquidity]]
* [[Liquidity]]
* [[Market liquidity risk]]
* [[Guide to risk management]]
* [[Guide to risk management]]


Revision as of 13:09, 3 May 2015

Liquidity risk has a number of important dimensions for the corporate treasurer. These include the corporate organisation as a whole, individual investments, and the wider markets for borrowing and lending.

  1. For an organisation, liquidity risk is the risk that the organisation ceases to have access to the cash it needs in order to meet its financial obligations as they fall due. This can arise from a number of different causes, both internal and external to the organisation.
  2. For an individual investment, liquidity risk is the risk that the investment cannot be turned into cash quickly and without significant loss in value.
  3. Liquidity risk at the market level includes the drying up of borrowing markets, disrupting the financing of individual organisations.


See also


Other links

Liquidity risk management, Will Spinney, ACT 2010

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