Business and Personal Finance Dictionary

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• LIQUIDITY RISK
  
  1. For a financial institution, the risk that not enough cash will be generated from either assets or liabilities to meet cash requirements. For a bank, cash requirements are primarily made up of deposit withdrawals or contractual loan fundings. One of six risks defined by the Federal Reserve and one of nine risks defined by the Office of the Comptroller of the Currency (OCC). The OCC defines liquidity risk as the risk to earnings and capital arising from a bank’s inability to meet its obligations when they become due, without incurring unacceptable losses. The Federal Reserve uses a broad definition of liquidity risk as the potential that an institution (a) will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain adequate funding (referred to as "funding liquidity risk") or (b) cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions ("market liquidity risk"). 2. For a security, the risk that not enough interested buyers will be available to permit a sale at or near the currently prevailing market price.
  
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