Understanding Liquidity Risk
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Funding liquidity is the availability of credit to finance the purchase of financial assets. The International Monetary Fund IMF defines funding liquidity as "the ability of a solvent institution to make agreed-upon payments in a timely fashion".
Liquidity is the key source of revenue for banks, and can be provided by either depositors or markets. Market liquidity and funding liquidity risk of fund sources include selling of assets and securities, syndicated loanssecondary market mortgagescapital marketsinter-bank marketand capital by borrowing from a central bank.
The degree of correlation between funding liquidity and market liquidity acts as an important parameter for evaluating the development of a financial market and reflects the activity of the market.
The possibility that a bank could become unable to settle obligations with immediacy is called Funding Liquidity Risk. Funding liquidity is essentially a binary concept: Funding liquidity risk, however, can take infinitely many values because market liquidity and funding liquidity risk is related to the distribution of future outcomes. A different time scale is implicit in this distinction. Funding liquidity is associated with one particular point in time.
Conversely, funding liquidity risk is always forward-looking and measured over a specific horizon. In this respect, concerns about the future ability to settle obligations, like future funding liquidity, will have an impact on current funding liquidity risk.
The distinction between liquidity and liquidity risk is straightforward and analogous to other risks. The liquidity and profitability of the funding vary inversely. If cash is the most liquid asset and a non-profit asset at the same time, it is unlikely to bring benefits to an enterprise. From Wikipedia, the free encyclopedia.
Funding liquidity risk [ edit ] The possibility that a bank could become unable to settle obligations with immediacy is called Funding Liquidity Risk. Funding liquidity and equity liquidity in the market liquidity and funding liquidity risk crisis period: Ssrn Electronic Journal, 37 7— Retrieved from " https: Views Read Edit View history. This page was last edited on 18 Aprilat By using this site, you agree to the Terms of Use and Privacy Policy.
