Liquidity Risk

Overview

Liquidity risk includes market liquidity and funding liquidity. Market liquidity concerns executing transactions near expected value, while funding liquidity concerns obtaining usable cash or assets in time to meet withdrawals, settlement, collateral, and operating obligations.

Depth can disappear during stress, and displayed volume may not represent executable capacity. Fragmented venues, depegs, network congestion, withdrawal limits, concentrated providers, or correlated sellers can widen spreads and delay conversion.

Organizations should map cash and asset flows, measure stressed exit capacity, diversify venues and funding, maintain buffers, set limits, and test withdrawals. Scenario analysis must include simultaneous outflows, provider failure, price gaps, and impaired collateral. Liquidity metrics should use executable size and timing rather than headline market volume.

For Liquidity Risk, production scope should name the relevant positions, obligations, counterparties, venues, prices, currencies, liquidity sources, accounts, and settlement paths, the decision being supported, the accountable owner, and the time and jurisdiction boundaries.

The financial and treasury workflow for Liquidity Risk should locate where evidence enters, where a rule or judgment is applied, what state changes, and which downstream service relies on the result.

Liquidity risk is the possibility that assets cannot be sold, converted, withdrawn, or obtained quickly enough without unacceptable loss or disruption. Liquidity is the ability to act at the required size and time, not merely the existence of a quoted market price.

For Liquidity Risk, the assessment should evaluate the possibility that assets cannot be sold, converted, withdrawn, or obtained quickly enough without unacceptable loss or disruption. The assessment record should separate observed evidence supporting the possibility that assets cannot be sold, converted, withdrawn, or obtained quickly enough without unacceptable loss or disruption from assumptions, state the time horizon and existing controls, and identify who owns any remaining exposure. Monitoring should test whether the conditions described in the possibility that assets cannot be sold, converted, withdrawn, or obtained quickly enough without unacceptable loss or disruption have changed enough to require a new rating, treatment, or approval.