How to Manage Liquidity Risk in Financial Institutions

By Aaron Brown

Part of Financial Risk Management For Dummies Cheat Sheet

Liquidity, the ability to convert assets to cash quickly, clearly affects your financial risk management decisions. If you don’t have enough liquidity, you may not be able to get out of untenable positions or be forced to sell assets at losses far beyond hopes and expectations. Too much liquidity makes it difficult to ignore short-term market opinion; too little liquidity insulates decision makers from reality.

A liquidity freeze in one market allows profitable transactions in related markets, however, and excess liquidity allows you to take positions that would be impossible in normal times.