Liquidity risk refers to the risk of the bank being unable to meet any of its obligations at any point of time. Such a risk arises due to mismatch of banks’ assets and liability structure. Effective management of this type of risk enhances capability of a bank to meet its obligations that fall due in future and, thus, reduces the probability of bank run.
One of the important scopes of Asset-liability management is management of liquidity risk. Therefore, measuring and managing liquidity needs are vital for effective operation of Banks and financial institutions.
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