What is liquidity risk?

In finance, the meaning of liquidity is the ability to pay what is due without selling assets at a loss. The Basel Committee's liquidity definition for banking reads: "Liquidity is the ability of a bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses" (BCBS, September 2008). The same paper explained why banks are exposed: they turn short-term deposits into long-term loans.

The paper splits what is meant by liquidity risk into two parts. Funding liquidity risk is "the risk that the firm will not be able to meet efficiently both expected and unexpected current and future cash flow and collateral needs". Market liquidity risk is "the risk that a firm cannot easily offset or eliminate a position at the market price because of inadequate market depth or market disruption".

The liquidity coverage ratio is the stock of high-quality liquid assets (HQLA) divided by the net cash outflows of a 30-day stress scenario. The Basel Framework requires that, "absent a situation of financial stress, the value of the ratio be no lower than 100%". In a stress period, a bank may use its HQLA and fall below 100% (LCR20.5).

In EU law this means two provisions: Article 412 CRR sets the general duty, and Article 4(2) of Delegated Regulation (EU) 2015/61 says credit institutions "shall maintain a liquidity coverage ratio of at least 100 %". The EU phased the ratio in, from 60% on October 1, 2015 to 100% on January 1, 2018.

The net stable funding ratio compares a bank's available stable funding with the stable funding its assets and off-balance sheet items require. Where the LCR covers 30 days, the NSFR looks at a one-year horizon (Regulation (EU) 2019/876, recital 46). Article 428b(2) CRR, inserted by that regulation, says institutions "shall maintain a net stable funding ratio of at least 100 %". The rule applies from June 28, 2021.

Liquidity risk is about the bank's own ability to pay on time; credit risk is about others paying the bank. A bank run is an example: the loans can be sound while the bank still runs out of cash. That case is the subject of liquidity vs solvency.

Market risk is a price move; market liquidity risk is not finding a buyer at that price. A bank that must sell assets fast to raise cash faces both at once.

In practice, liquidity management follows BaFin's MaRisk module BTR 3.1: a bank must make sure it can meet its payment obligations at any time. It must spot a coming liquidity shortage early, with procedures reviewed at least once a year, and keep liquidity overviews that set expected inflows against expected outflows.

Stablecoin issuers carry liquidity risk because holders can ask for their money back. Under Article 49(4) of MiCA, the issuer of an e-money token must redeem it "at any time and at par value". Issuers of significant asset-referenced tokens must set up a liquidity management policy to meet redemption requests (Article 45(3) MiCA). For banks, Article 501d CRR asks the European Commission to propose specific liquidity requirements for crypto-asset exposures.

In Germany and Austria the CRR and Delegated Regulation (EU) 2015/61 apply directly. In Germany, the Bundesbank and BaFin share banking supervision, and MaRisk module BTR 3 sets the liquidity risk processes. In Austria, the FMA supervises banks with the OeNB; the ECB supervises significant banks in both countries (OeNB).

Banks in the euro area get central bank money from the Eurosystem: the ECB, seated in Frankfurt am Main, together with the national central banks (ECB). Main refinancing operations provide liquidity, usually for one week; longer-term refinancing operations run for three months and take place monthly. National central banks such as the Bundesbank carry them out (ECB, open market operations).

Switzerland is outside the EU, so the CRR does not apply there. The Federal Council's Liquidity Ordinance sets the LCR and, since July 1, 2021, the NSFR (FINMA, November 12, 2020). From January 1, 2027, FINMA's new Ordinance on the Liquidity of Banks and Securities Firms (LiqO-FINMA) replaces its Circular 2015/2 on liquidity risks at banks (FINMA, July 7, 2026). This page gives no legal advice.