In general, the risk of not having sufficient liquidity available to settle liabilities due on time (the eventuality of not having access to liquidity or unutilized credit facilities in order to settle payments due). This risk can be mitigated through accurate financial planning. Appropriate liquidity management must ensure that a company in general and an institution in particular remain solvent even in times of crisis. – In the case of banks, a possible loss is mainly due to the fact that – a large number of depositors withdraw their deposits at the same time for some reason (withdrawal risk) and – the bank cannot extend its short-term borrowing via the interbank money market or can do so only at increased cost (refinancing risk); the reason for this could be, for example, the downgrading of the institution by rating agencies. – In general, a higher liquidity risk is seen in the case of very large, widely diversified institutions. – Since around 2007, this risk has also included the risk that assets cannot be converted into cash because of reduced access to or demand from the market, which either precludes the purchase or sale of such items, or would require their sale at a loss. This risk was particularly evident in the financial crisis that arose in the wake of the subprime crisis in 2007. Many investors around the world – including hedge funds – were suddenly forced to sell assets, which led to a sharp drop in prices. – The distinction between liquidity risk and solvency risk often causes difficulties. A liquidity risk means that there is no cash available at the moment to meet payment obligations. As a rule, however, a company in this situation can take out a loan from the bank and thus overcome the liquidity squeeze. In contrast, insolvency risk means the risk that liabilities will exceed assets. In this case, hardly any institution will extend a loan and the company will go bankrupt. – See meltdown risk, bank money market, EURIBOR, contingent loss, counterparty, central, gigabank, LIBOR, liquidity forms, liquidity crisis plan, liquidity buffer, liquidity swap, liquidity regulation, marketability, market risk, risk, banking, operational, risk management, solvency supervision, solvency risk, forward risk. – Cf. ECB Monthly Report of August 2002, p. 60 f., BaFin Annual Report 2007, p. 115 f. (new rules on liquidity risk management; MaRisk to be applied to liquidity risks as of the beginning of 2008; practical studies), Deutsche Bundesbank Monthly Report of September 2008, p. 59 ff. (liquidity risk management), BaFin Annual Report 2008, p. 56 (rules on liquidity risk management), p. 133 (audits of institutions’ internal risk models), BaFin Annual Report 2009,
p. 50 f. (Cornerstones for liquidity risk management), BaFin Annual Report 2010,
p. 189 (separate MaRisk for capital management companies).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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