Liquidity risk is split into two operational categories: Funding Liquidity Risk—the risk that an organization cannot meet its short-term financial obligations as they fall due—and Market Liquidity Risk—the risk that an asset cannot be sold quickly at a fair market price due to a lack of buyers.

To ensure financial institutions can survive a severe short-term liquidity crunch, regulators enforce the Liquidity Coverage Ratio (LCR). The plain-text regulatory formula requires:

LCR = High Quality Liquid Assets / Total Net Cash Outflows Over a 30 Day Stress Window

The ratio must remain equal to or greater than 100%, meaning the institution must hold sufficient high-quality liquid assets (such as cash and sovereign bonds) to survive a 30-day liquidity squeeze without external funding support.

Corporate treasury teams use Asset-Liability Management to match the cash flow timelines of their assets with their liabilities, preventing duration mismatches where long-term, illiquid assets are funded by volatile, short-term borrowings.