DEFINITION
Liquidity Risk

"Liquidity risk": Liquidity is access to cash, and liquidity risk revolves around fluctuations in the ability to access cash when it is needed. It is very difficult to find a universally accepted definition of liquidity risk. However, it is commonly accepted that liquidity risk comes in two forms: i. Funding liquidity risk and ii. Market liquidity risk. i. Funding liquidity risk is defined as a company’s inability to obtain funds to meet cashflow obligations. ii. Market liquidity risk refers to the risk that market transactions will become impossible due to market disruptions or inadequate market depth. The two forms cross over however. For example if commercial paper or bond markets dry up that is market risk, which will immediately become funding risk if the borrower has insufficient committed bank facilities to act as a stop gap.
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