FinTech Glossary

What Is Liquidity Risk

Liquidity risk is the risk that an individual or organisation will be unable to meet short-term financial obligations as they fall due, without incurring significant losses or disruption.

How Liquidity Risk Arises

Liquidity risk may result from delayed customer payments, unexpected expenses, or limited access to funding.

Over-reliance on short-term borrowing or poor cash planning can also increase exposure.

Market disruptions can further restrict access to liquid funds.

Types of Liquidity Risk

Liquidity risk is commonly classified into:

1. Funding liquidity risk related to the inability to raise funds
2. Market liquidity risk is linked to the difficulty of selling assets quickly
3. Operational liquidity risk caused by internal cash flow inefficiencies

Each type affects financial stability differently.

Managing Liquidity Risk

Liquidity risk is managed through:

• Cash flow forecasting
• Maintaining liquidity buffers
• Monitoring receivables and payables
• Diversifying funding sources
• Setting risk thresholds and alerts

Proactive management reduces vulnerability.