Liquidity Risk

Glossary

Banking

Liquidity Risk

Investors run liquidity risk if they are unable to sell or source securities or investments immediately in reasonable size without loss of value on the sell side or without paying up on the buy side. Post-GFC regulation that has drained dealer liquidity from the system owing to the enhanced costs and regulatory restrictions on holding inventory has raised liquidity risk in securities markets. Borrower face liquidity risk if they are unable to access markets at economic cost to refinance maturing debt. Liquidity risk for banks has been eliminated by the Liquidity Coverage Ratio (LCR, cf.) which requires banks to maintain a stock of high quality liquid assets (HQLA) to cover modelled potential outflows over 30 days in stressed conditions.

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