©2009, The McGraw-Hill Companies, All Rights Reserved 21-3 McGraw-Hill/Irwin Liquidity Risk Management One type of liquidity risk arises when an FI's liability holders seek to withdraw their financial claims –FIs must meet the withdrawals with stored or borrowed funds –alternately, FIs may have to sell assets to generate cash, which can be costly if assets can only be sold at fire-sale prices A second type of liquidity risk arises when commitments made by the FI and recorded off-the-balance-sheet are exercised by the commitment holder –unexpected loan demand can occur when off-balance-sheet loan commitments are drawn down suddenly and in large volumes –FIs are contractually obliged to supply funds through loan commitments immediately should they be drawn down One type of liquidity risk arises when an FI's liability holders seek to withdraw their financial claims –FIs must meet the withdrawals with stored or borrowed funds –alternately, FIs may have to sell assets to generate cash, which can be costly if assets can only be sold at fire-sale prices A second type of liquidity risk arises when commitments made by the FI and recorded off-the-balance-sheet are exercised by the commitment holder –unexpected loan demand can occur when off-balance-sheet loan commitments are drawn down suddenly and in large volumes –FIs are contractually obliged to supply funds through loan commitments immediately should they be drawn down
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