Nearly every transaction has implications on your bank’s liquidity, so you need a liquidity risk management strategy that ensures your cash flow is sufficient and you’re prepared for external market shifts or changes in depositor behavior.

The Impact of Liquidity Risk on Internal and External Factors Nurul Atikah Abdul Latif Universiti Utara Malaysia 1.0 INTRODUCTION 1.1 Introduction In this chapter, we describe the overview of the industry and defined the problem statement for this study. ... pressure, and the inability of the bank to find internal or external liquid sources.
Who is this guide for? We also stated the research objective, research question and also the scope of the study. Sources of liquidity risk 3 2. The Federal Reserve defines three types of external liquidity risk. Effective liquidity risk management helps ensure a bank's ability to meet cash flow obligations, which are uncertain as they are affected by external events and other agents' behaviour. The risk that a bank will experience funding problems as a result of factors outside of its direct control. Market risk: Uncertainty due to changes in market prices.
Liquidity Gap: The difference between a firm's assets and a firm's liabilities, caused by said assets and liabilities not sharing the same properties. 2 1.

Liquidity risk stress testing is very different than that of market risk as the latter tends to be tied to systematic drivers over time such as declining GDP, or overvalued markets. Liquidity can be generated internally or externally as the figure below shows. Operational risk: Institutional uncertainties other than market or credit risk. Need for adequate liquidity 4 ... with understanding and managing liquidity risk. Adequate liquidity is dependent upon the institution’s ability to efficiently meet both expected and unexpected cash flows and collateral needs without adversely affecting either daily operations or the financial condition of the institution. In this paper, we explain the meaning of liquidity, liquidity risk and liquidity risk management. Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. This provides that banks heavily depend on the extern al funding face larger liq uidity problem. This guide is designed to assist members who have ... to prospective success of internal and external funding. Credit risk: Uncertainty due to a failure of an external entity to keep a promise.

It also discusses the process of building up of a liquidity risk management system. Many of the liquidity stressed events that we’ve directly observed in recent years have their roots in a single day and event that triggered them. Liquidity risk: Uncertainty about terms and the ability to make a transaction when necessary or desired. Mr. Greenspan, Chairman of the Federal Reserve Board of the United States, has recently proposed what he called a “liquidity-at-risk” standard. Liquidity risk management is of paramount importance because a liquidity shortfall at a single institution can have system-wide repercussions. However, external funding dependence (EFD) has the positive effect on bank’s liquidity risk. The objective of liquidity risk management is to minimise the risk that the group/company will not have sufficient liquidity and/or credit lines to meet its current or future financial obligations regardless of unexpected changes in business and market conditions. What is liquidity risk? External Liquidity Risk as per FinanceGlossary.net is A term defined by the Federal Reserve.