Liquidity Risk

Liquidity risk is the current and potential risk to earnings or capital arising from a financial institution's inability to meet its obligations when they come due without incurring unacceptable losses.  Liquidity risk related to payment systems is the risk that the financial institution cannot settle an obligation for full value when it is due but rather at some unspecified time in the future.  Liquidity problems can result in opportunity costs, defaults on other obligations, and costs associated with obtaining the funds from an alternative source for possibly extended periods of time.  In addition, operational failures may also negatively affect liquidity if payments do not settle within an expected time period.

 

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