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- Liquidity risk is a measure of a bank's ability to meet its obligations and fund increases in its assets. High liquidity risk may be a sign that a bank is in danger of failure. Supervisory agencies, such as the FDIC, are responsible for ensuring that banks manage their liquidity risk.
smallbusiness.chron.com/liquidity-risk-management-supervisory-challenges-42751.htmlLiquidity Risk Management & Supervisory Challenges - Chron.com
These factors give rise to a different and significant set of challenges for firms in assessing their liquidity risk and for supervisors in the evaluation of risk management and controls. Financial innovation and global market developments have transformed the nature of liquidity risk in recent years.
- Liquidity Risk: Management and Supervisory Challenges
This document highlights financial market developments that...
- Liquidity Risk: Management and Supervisory Challenges
This document highlights financial market developments that affect liquidity risk management, discusses national supervisory regimes and their components, and then outlines initial observations from the current period of stress and potential future work related to liquidity risk management and supervision.
- Understanding Liquidity Risk
- Market Liquidity Risk
- Funding Liquidity Risk
- Liquidity Risk and Banks
- Liquidity Risk and Corporations
- How Individuals Can Manage Liquidity Risk
- The Bottom Line
Liquidity risk refers to the challenges a firm, organization, or other entity might encounter in fulfilling its short-term financial obligations due to insufficient cash or the inability to convert assets into cash without incurring significant losses. This risk may arise from various scenarios, including market changes, unexpected expenses or with...
Market liquidity is defined by the ease with which an asset can be exchanged for money. The risks relate to when an entity cannot execute transactions at prevailing market prices due to inadequate market depth, a lack of available buyers for assets held, or other market disruptions. This risk is especially pronounced in illiquid markets, where imba...
Funding liquidity risk pertains to the challenges an entity may face in obtaining the necessary funds to meet its short-term financial obligations. This is often a reflection of the entity's mismanagement of cash, its creditworthiness, or prevailing market conditions which could deter lenders or investors from stepping in to help. For example, even...
Banks' liquidity risk naturally arises from certain aspects of their day-to-day operations. For example, banks may fund long-term loans (like mortgages) with short-term liabilities (like deposits). This maturity mismatch creates liquidity risk if depositors withdraw funds suddenly. The mismatch between banks' short-term funding and long-term illiqu...
Like banks, corporations may fund long-term assets like property, plant & equipment (PPE)with short-term liabilities like commercial paper. This exposes them to potential liquidity risk. Volatile cash flows from operations can make it difficult to service short-term liabilities. As a result, seasonal businesses are especially exposed. Delayed payme...
Liquidity risk is a very real threat to individuals' personal finances. Job loss or an unexpected disruption of income can quickly lead to an inability to meet bills and financial obligations or cover basic needs. Individuals face heightened liquidity risk when they lack adequate emergency savings, rely on accessing long-term assets like home equit...
Liquidity risk is a factor that banks, corporations, and individuals may encounter when they are unable to meet short-term financial obligations due to insufficient cash or the inability to convert assets into cash without significant loss. Managing this risk is crucial to prevent operational disruptions, financial losses, and in severe cases, inso...
- Will Kenton
Following the 2008-09 Global Financial Crisis, regulators released guidance and focused their supervisory efforts across three core pillars: capital adequacy, soundness of internal controls and timely monitoring of emerging liquidity risks.
An institution should establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources.
As well, it underscores the importance of strong liquidity-risk management by banks in reducing the likelihood and severity of future financial crises, and outlines the benefits of the Basel III liquidity standards. Finally, it discusses some aspects of the LCR that merit further consideration.
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What is a liquidity risk management framework?
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What is the primary role of liquidity-risk management?
What is liquidity risk?
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What is funding liquidity risk?
The primary role of liquidity-risk management is to (1) prospectively assess the need for funds to meet obligations and (2) ensure the availability of cash or collateral to fulfill those needs at the appropriate time by coordinating the various sources of funds available to the institution under normal and stressed conditions. Policy Letters.
