ICAA Loading...
Liquidity risk refers to the risk that a financial institution or investment will not be able to meet its financial obligations when they come due because it cannot find sufficient liquidity (cash or other highly liquid assets) to meet its immediate debts. This can occur for a number of reasons, such as a decrease in the value of assets, a decline in the institution's creditworthiness, or an increase in funding costs. Institutions and investments that are highly leveraged (have a high level of debt relative to their assets) are particularly vulnerable to liquidity risk, as they may not have enough assets to meet their debt obligations if they are unable to borrow more funds. Managing liquidity risk is an important part of financial risk management, as it can help prevent financial institutions and investments from experiencing financial distress or failure.
“Liquidity risk is the risk that a fund cannot meet redemption requests on the assets it holds without significant loss. This risk is particularly relevant to open-ended funds, which allow investors to buy and sell shares on a daily basis. If a fund has to sell assets to meet redemption requests, and the market for those assets is illiquid or the assets themselves are difficult to sell, the fund may have to sell at a discount, resulting in losses for the remaining investors.” Financial Conduct Authority, UK regulatory body.
Managing liquidity risk involves identifying the sources of liquidity risk that an institution or investment may face, and taking steps to mitigate those risks, such as maintaining a sufficient level of liquid assets or diversifying funding sources.
There are several types of liquidity risk that financial institutions and investments may face:
Our goal in liquidity risk consulting is to help our clients minimize the impact of liquidity risk on their financial stability and performance, and to ensure that they are able to meet their financial obligations when they come due.
We offer services to help clients understand, manage, and mitigate their liquidity risk. This may include: