Liquidity risk is the risk of loss resulting from the inability to meet payment obligations in full and on time when they become due.
Liquidityrisk is inherent to the Bank's business and results from the mismatch inmaturities between assets and liabilities. It may be related to funding – impossibilityto obtain new funding – and to markets – inability to sell or convert liquidassets into cash without significant losses.
TheCEB manages liquidity risk in a prudent manner, holding a liquidity reserve ofhighly rated liquid securities to cope with periods of extreme marketconditions during which new funding would become inaccessible. The fundingstrategy is an important element of liquidity risk management, with the CEBdiversifying its debt issuance programs, funding markets and investor base toavoid over-reliance on individual markets or funding sources.
TheCEB measures liquidity risk using internal metrics and regulatory indicatorscomplemented by qualitative analysis in line with Baseland EU regulations. It defines its risk appetite based on the SurvivalHorizon metric, which measures the period during which it can meet its paymentobligations arising from ongoing business operations under severe stress scenarios,and also by meeting the regulatory requirements for the Liquidity CoverageRatio and the Net Stable Funding Ratio.
FAQs
Liquidity risk is the risk of loss resulting from the inability to meet payment obligations in full and on time when they become due. Liquidity risk is inherent to the Bank's business and results from the mismatch in maturities between assets and liabilities.
What best describes liquidity risk? ›
Liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost. Liquidity risk is managed through a series of measures, tests and reports that are primarily based on contractual maturity.
What is liquidity or credit risk? ›
Credit risk is when companies give their customers a line of credit; also, a company's risk of not having enough funds to pay its bills. Liquidity risk refers to how easily a company can convert its assets into cash if it needs funds; it also refers to its daily cash flow.
What are examples of liquidity risks in banks? ›
A liquidity risk example in banks is a decline in deposits or rise in withdrawals (which are liabilities for the bank). As a result, the bank is unable to generate enough cash to meet these obligations. This was dramatically illustrated by the global financial crisis of 2008-2009.
What is high risk of liquidity? ›
Typically, high liquidity risk indicates that particular security cannot be readily bought or sold in the share market. This is because an issuing company might face challenges in meeting its current liabilities due to reduced cash flow.
What provide liquidity risks? ›
Liquidity Provider Risks: Liquidity providers may be exposed to risks like slippage, asset depreciation, and impermanent loss, which can affect their overall returns. Understanding these risks is important before providing liquidity to a pool.
What is liquidity for dummies? ›
Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Cash is the most liquid of assets, while tangible items are less liquid. The two main types of liquidity are market liquidity and accounting liquidity.
What is another name for liquidity risk? ›
There are two different types of liquidity risk. The first is funding liquidity or cash flow risk, while the second is market liquidity risk, also referred to as asset/product risk.
What is the liquidity risk vulnerability? ›
Market liquidity risk is the risk that a firm cannot easily offset or eliminate a position at the market price because of inadequate market depth or market disruption.
Why do banks face liquidity risk? ›
Reasons that banks face liquidity problems include over-reliance on short-term sources of funds, having a balance sheet concentrated in illiquid assets, and loss of confidence in the bank on the part of customers. Mismanagement of asset-liability duration can also cause funding difficulties.
Downside liquidity risk is measured by higher moment of liquidity-liquidity skewness. Downside liquidity risk premium significantly exists in Chinese stock market. Downside liquidity risk premium is persistent within the future one year.
What is the liquidity risk in payments? ›
Liquidity risk principally entails a cashflow shortfall. The distinction may, however, not always be clear in practice. Indeed, liquidity shortfalls may be costly, forcing the party expecting a payment to engage in relatively expensive borrowing or unprofitable asset sales.
What are the three types of liquidity risk? ›
The three main types are central bank liquidity, market liquidity and funding liquidity.
Who is most affected by liquidity risk? ›
The fundamental role of banks typically involves the transfor- mation of liquid deposit liabilities into illiquid assets such as loans; this makes banks inherently vulnerable to liquidity risk. Liquidity-risk management seeks to ensure a bank's ability to continue to perform this fundamental role.
How to avoid liquidity risk? ›
Management of liquidity risk is critical to ensure that cash needs are continuously met. For instance, maintaining a portfolio of high-quality liquid assets, employing rigorous cash flow forecasting, and ensuring diversified funding sources are common tactics employed to mitigate liquidity risk.
What is liquidity risk quizlet? ›
What is liquidity risk? • The risk that an institution will not meet its liabilities as they become due as a. result of: - Inability to liquidate assets or obtain funding. - Inability to unwind or offset exposure without significantly lowering market price.
What does liquidity mean? ›
Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Cash is the most liquid of assets, while tangible items are less liquid. The two main types of liquidity are market liquidity and accounting liquidity.
What is the liquidity risk in insurance? ›
Liquidity risk could include two different types of risk: the risk that an insurance company will become unable to assure itself of adequate funding due to a decline in new premium income caused by a deterioration, etc.
