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Chapter 22 Concept Map: Liquidity Risk - Coggle Diagram
Chapter 22 Concept Map: Liquidity Risk
4. Abnormal Deposit Drains
Rumors or negative news
Loss of confidence in a bank
Financial panic or economic uncertainty
Large customers withdrawing funds
Concerns about bank solvency
Result: Deposits leave faster than expected, potentially causing a bank run.
5. Insurance Companies
Unexpected claims
Catastrophes and natural disasters
Large claim payments occurring together
Policyholders surrendering policies
Assets that are difficult to sell quickly
Result: Insurers may need to sell investments or raise cash to pay claims.
3. Measuring Liquidity Risk
Loans-to-deposits ratio
Liquid assets-to-total assets ratio
Cash flow forecasts
Deposit stability and concentration
Funding gap and stress testing
Goal: Identify potential cash shortages before they become serious.
1. Causes of Liquidity Risk
Unexpected cash withdrawals
Too many loans or illiquid assets
Mismatch between asset and liability maturities
Difficulty borrowing or selling assets
Loss of customer or investor confidence
Result: The institution may not have enough available cash to pay its obligations.
6. Investment Funds
Investors requesting redemptions
Market downturns and panic selling
Illiquid investments
Mismatch between redemption terms and asset liquidity
Forced asset sales at reduced prices
Result: Funds may struggle to meet withdrawals without selling assets at a loss.
2. Managing Liquidity Risk
Hold cash and liquid securities
Maintain access to borrowing
Diversify funding sources
Match asset and liability maturities
Prepare emergency funding plans
Goal: Have enough funds available when payments come due.