What is meant by Liquidity Risk? Discuss the importance of liquidity in banking operations and explain how is liquidity risk measured?

Liquidity risk is a financial risk that for a certain period of time a given financial asset, security or commodity cannot be traded quickly enough in the market without impacting the market price.

Importance of liquidity in banking operations

Large banking groups engage themselves in substantial capital markets businesses and they have considerable added complexity in their liquidity requirements. This is done to support repo businesses, derivatives transactions, prime brokerage, and other activities.

Banks can achieve liquidity in multiple ways. Each of these methods ordinarily has a cost, comprising of −

• Shorten asset maturities
• Improve the average liquidity of assets
• Lengthen
• Liability maturities
• Issue more equity
• Reduce contingent commitments
• Obtain liquidity protection

Shorten asset maturities

This can assist in two fundamental ways. The first way states that, if the maturity of some assets is shortened to an extent that they mature during the duration of a cash crunch, then there is a direct benefit. The second ______ ______ ______ ____ ____ _____ _____ __________.
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