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22mfs005 Liquidity Risk

Liquidity risk refers to a bank or financial institution's inability to meet its obligations due to a lack of liquid assets. There are two main types of liquidity risk: funding liquidity risk and asset liquidity risk. Proper liquidity risk management is crucial, as was demonstrated by banks struggling during the 2008 financial crisis due to poor liquidity management. Liquidity risk can arise from gaps between demand and supply, asset type, cash flow issues, unexpected capital needs, or sudden economic downturns. Key ways to manage liquidity risk include identifying it early, forecasting cash flows, monitoring liquidity regularly, stress testing, and having backup contingency plans.

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FARZIYA TASNEEM M GRGSMS
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50 views6 pages

22mfs005 Liquidity Risk

Liquidity risk refers to a bank or financial institution's inability to meet its obligations due to a lack of liquid assets. There are two main types of liquidity risk: funding liquidity risk and asset liquidity risk. Proper liquidity risk management is crucial, as was demonstrated by banks struggling during the 2008 financial crisis due to poor liquidity management. Liquidity risk can arise from gaps between demand and supply, asset type, cash flow issues, unexpected capital needs, or sudden economic downturns. Key ways to manage liquidity risk include identifying it early, forecasting cash flows, monitoring liquidity regularly, stress testing, and having backup contingency plans.

Uploaded by

FARZIYA TASNEEM M GRGSMS
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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LIQUIDITY RISK

MANAGEMENT

Farziya Tasneem.M
22MFS005
Meaning
Liquidity risk refers to the incapacity of any bank or financial institution to
pay off its obligations and dues.
The potential that an entity will be unable to acquire the cash required to
meet short or intermediate term obligations.
Types
1. Funding liquidity Risk
2. Asset Liquidity Risk
The Need to Manage Liquidity Risk

Before the global economic crisis of 2008, financial institutions used to follow
liberal liquidity management policies. The exact picture came into notice when
banks struggled to maintain adequate liquidity during the crisis, resulting in
bankruptcy and failure of top banks of the world. The recession scenario changed
the outlook for the better. Banks and central banks understood the need for
stringent regulations and the most acceptable ways of managing liquidity risk.
Reasons for Liquidity Risk
• Gap between Demand and Supply
• Type of asset
• Cash flow constraints
• Deficit Cash Flow Management 
• Inadequate Obtaining of Funds 
• Unexpected Capital Expenditures 
• Sudden Economic Crisis
Ways to manage Liquidity Risk
• Identifying Liquidity risk early on
• Effective Cash flow forecasts
• Monitoring and Controlling liquidity on regular basis
• Investment Management
• Conducting a scheduled stress test
• Creating a backup or contingency plan
THANK YOU

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