This lesson examines liquidity risk, including market liquidity and funding liquidity, as well as asset-liability management (ALM) risk. It covers the interrelationship between liquidity risks and systemic financial stability .

• Definition of Liquidity Risk: Liquidity risk occurs when transactions cannot be conducted at prevailing market prices, perhaps due to cash flow constraints . It encompasses both market liquidity (ability to sell assets without significant price impact) and funding liquidity (ability to meet cash flow obligations).

• Liquidity Risk Management: The course covers tools for measuring and managing liquidity risk, including stress testing and scenario analysis . The interrelationship between market liquidity and funding liquidity is a key concept . The role of liquidity during financial crises is examined through case studies.

• Asset-Liability Management (ALM) Risk: ALM risk addresses the management of the maturity and interest rate mismatch between assets and liabilities. This is particularly important for financial institutions like banks and insurance companies. The course examines how ALM risks are identified, measured, and managed .

• Systemic Risk Implications: The interconnectedness of liquidity risks and systemic risk is examined. The concepts of central counterparties (CCP) as a mechanism for managing counterparty and liquidity risk are covered . The role of the shadow banking system and its implications for systemic liquidity risk is also addressed .