Liquidity risk refers to the potential difficulty an organization may face in quickly converting assets into cash without significantly impacting their market value. This risk arises when there is an insufficient market for an asset or when a company is unable to meet its short-term financial obligations due to lack of cash or access to funding. Factors contributing to liquidity risk include market conditions, economic downturns, and operational inefficiencies. Effective management involves maintaining adequate cash reserves, diversifying funding sources, implementing liquidity forecasting, and conducting regular assessments of market conditions to ensure the organization can meet its obligations as they arise.

Basel scope:

• Pillar 2

Capital requirements:

Not Mitigated by Capital

Related Links:

•       Basel Framework
•       Fed; parallel OCC/FDIC rules: Liquidity Risk