Liquidity risk: Difference between revisions

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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.  
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.
These include the corporate organisation as a whole, individual investments, and the wider markets for borrowing and lending.


:i. Funding liquidity risk is defined as a company’s inability to obtain funds to meet cashflow obligations.
#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.
#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.
The overall aim of liquidity management is to ensure that the company can meet its payment obligations as they fall due.  


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.
Consequently, in its broadest terms, liquidity risk includes all the risks that adversely affect liquidity management, i.e. that impact the organisation's ability to pay.
 
When managing liquidity a treasurer needs to consider the wider environmental aspects such as the riskiness of the sector or industry, market and economic issues, as well as the more direct aspects of delivering liquidity to the business.
 
 
For this reason liquidity risk is integrated with business strategy and the fortunes of the business itself, and corporate treasurers need to understand the business model of their organisations to properly manage liquidity risk.
 
 
For banks and other financial organisations, liquidity risk management is fundamentally important because of their maturity mismatch, combined with high levels of leverage.




== See also ==
== See also ==
* [[Authorisation]]
* [[Authority limits]]
* [[Bank]]
* [[Cash]]
* [[Cash]]
* [[Cash and cash equivalents]]
*[[Cash balance]]
*[[Cash flow]]
* [[Cash forecasting]]
* [[Cash pool]]
* [[CFP]]
* [[CRD IV]]
* [[Credit rating risk]]
* [[Current ratio]]
* [[Deep market]]
* [[Documentation risk]]
* [[Emergency liquidity assistance]]
* [[Flight to liquidity]]
* [[Funding]]
* [[Funding liquidity risk]]
* [[Funding risk]]
* [[Funds]]
* [[Gilts]]
* [[Guide to risk management]]
* [[Headroom target]]
* [[High Quality Liquid Assets]]  (HQLAs)
* [[Illiquid]]
* [[Individual Liquidity Guidance]]
* [[Insolvency]]
* [[Internal Liquidity Adequacy Assessment Process]]  (ILAAP)
* [[Leverage]]
* [[Leverage]]
* [[Liquid]]
* [[Liquidate]]
* [[Liquidation]]
* [[Liquidity]]
* [[Liquidity]]
* [[Liquidity buffer]]
* [[Liquidity Coverage Ratio]]
* [[Liquidity fee]]
* [[Liquidity Fund]]
* [[Liquidity gap]]
* [[Liquidity insurance]]
* [[Liquidity management]]
* [[Liquidity preference]]
* [[Liquidity premium]]
* [[Liquidity run]]
* [[Liquidity stress]]
* [[Liquidity upgrade]]
* [[Market liquidity risk]]
* [[Market risk]]
* [[Maturity mismatch]]
* [[Money management]]
* [[Net Stable Funding Ratio]]
* [[Overall Liquidity Adequacy Rule]]  (OLAR)
* [[Prudential Regulation Authority]]
* [[Quick ratio]]
* [[Run]]
* [[Security]]
* [[Solvency]]
* [[Stress]]
* [[Supervisory Review and Evaluation Process]]  (SREP)
* [[Supply chain finance]]
* [[Survival period]]
* [[Time subordination]]
* [[Yield]]


 
[[Category:Manage_risks]]
==Other links==
[[Category:Risk_frameworks]]
[http://www.treasurers.org/node/5644 Liquidity risk management, Will Spinney, ACT 2010]
[[Category:Liquidity_management]]

Latest revision as of 23:29, 17 March 2023

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.


The overall aim of liquidity management is to ensure that the company can meet its payment obligations as they fall due.

Consequently, in its broadest terms, liquidity risk includes all the risks that adversely affect liquidity management, i.e. that impact the organisation's ability to pay.

When managing liquidity a treasurer needs to consider the wider environmental aspects such as the riskiness of the sector or industry, market and economic issues, as well as the more direct aspects of delivering liquidity to the business.


For this reason liquidity risk is integrated with business strategy and the fortunes of the business itself, and corporate treasurers need to understand the business model of their organisations to properly manage liquidity risk.


For banks and other financial organisations, liquidity risk management is fundamentally important because of their maturity mismatch, combined with high levels of leverage.


See also

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