Learning Objectives:

  • Define liquidity risk and its key dimensions.

  • Apply key liquidity metrics: LCR, NSFR, and survival days.

  • Understand the role of the ILAAP and contingency funding plans.

5.1 Defining Liquidity Risk

The University of Nottingham identifies “liquidity risk” as a core banking risk . The Financial Academy’s programme covers “liquidity risk management principles, strategies, applications, and practical cases” . The CEA course in Madrid covers “liquidity risk versus solvency risk” and the “management of liquidity risk” .

Funding Liquidity Risk: The risk that the bank cannot obtain sufficient funding to meet its obligations.

Market Liquidity Risk: The risk that the bank cannot sell assets quickly without a significant price discount.

5.2 Key Liquidity Metrics

The BTRM course covers “liquidity risk indicators” as a core topic . Key metrics include:

  • Liquidity Coverage Ratio (LCR): High-quality liquid assets divided by total net cash outflows over 30 days (minimum 100%) .

  • Net Stable Funding Ratio (NSFR): Available stable funding divided by required stable funding (minimum 100%) .

  • Survival Days: The number of days the bank could survive without access to funding .

  • Loan-to-Deposit Ratio: A measure of the bank’s reliance on deposits for funding.

5.3 ILAAP and Contingency Funding

The BSA course covers the “ILAAP and liquidity risk management” . Key elements include:

  • ILAAP: The Internal Liquidity Adequacy Assessment Process—the bank’s own assessment of its liquidity needs.

  • Contingency Funding Plan (CFP): A plan for addressing severe liquidity stress.

  • Bank of England Facilities: Access to central bank facilities in times of stress .

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