How categorising liquidity risk helps banks improve visibility, compliance, and resilience
Banks face increasing pressure to manage liquidity risk effectively. But far too often, it’s treated as a single, generic figure on a dashboard—one big, undefined blob. That’s a risk in itself.
In reality, liquidity risk comes in several distinct forms, and each behaves differently in times of stress. If you’re not distinguishing between them, you’re missing early warning signs—and opportunities to act.
What Is Liquidity Risk?
Liquidity risk is the risk that a bank will not be able to meet its financial obligations when they come due, without incurring significant losses. But that’s the high-level definition. To manage it effectively, banks need to dig deeper and categorise it properly.
Why Categorising Liquidity Risk Matters
Banks that fail to categorise liquidity risk properly often:
- Struggle to comply with regulations like LCR, NSFR, and IRRBB
- Lack visibility into short-term vs. long-term liquidity needs
- Miss critical intraday movements or unexpected outflows
- Make decisions based on incomplete or outdated data
Categorising liquidity risk helps banks:
- Improve liquidity risk monitoring and reporting
- Identify funding gaps earlier
- Align Treasury and ALM strategies
- Strengthen stress testing and contingency planning
The Four Main Categories of Liquidity Risk
Understanding the different types of liquidity risk is the first step toward better management. Here are the four key categories every bank should be tracking:
1. Funding Liquidity Risk
The risk of not being able to meet expected cash outflows—repaying deposits, settling obligations, refinancing debt. This is often the most visible form of liquidity risk.
2. Market Liquidity Risk
The risk of not being able to sell assets quickly without affecting their market value. In times of market stress, even “high-quality” assets can become illiquid.
3. Intraday Liquidity Risk
The risk of not being able to meet payment obligations in real time during the business day. This includes settlement timing, payment systems, and margin calls.
4. Contingent Liquidity Risk
The risk of unexpected outflows due to off-balance sheet exposures or stressed scenarios, such as credit line drawdowns or customer panic.
Common Mistakes in Liquidity Risk Management
Many banks still rely on outdated systems and siloed data, leading to:
Weak stress testing frameworks
- Overreliance on averages and end-of-day balances
- Missed signals in intraday liquidity positions
- Gaps between Treasury and ALM views
How MORS Software Helps Banks Categorise and Manage Liquidity Risk
At MORS Software, we work with banks to improve liquidity risk visibility across all four categories—with online data, built-in analytics, and clear reporting tools.
Treating liquidity risk as one big, undifferentiated number is no longer good enough.
With growing regulatory demands and market uncertainty, banks need to categorise, measure, and manage liquidity risk with precision. Start by breaking the blob into its core components—funding, market, intraday, and contingent—and equip your teams with the tools to monitor them.