Liquidity (Risk) Concepts: Definitions and Interactions

72 Pages Posted: 23 Feb 2009

Date Written: February 23, 2009

Abstract

We discuss the notion of liquidity and liquidity risk within the financial system. We distinguish between three different liquidity types, central bank liquidity, funding and market liquidity and their relevant risks. In order to understand the workings of financial system liquidity, as well as the role of the central bank, we bring together relevant literature from different areas and review liquidity linkages among these three types in normal and turbulent times. We stress that the root of liquidity risk lies in information asymmetries and the existence of incomplete markets. The role of central bank liquidity can be important in managing a liquidity crisis, yet it is not a panacea. It can act as an immediate but temporary buyer to liquidity shocks, thereby allowing time for supervision and regulation to confront the causes of liquidity risk.

Keywords: liquidity, risk, central bank, LLR

JEL Classification: G10, G20

Suggested Citation

Nikolaou, Kleopatra, Liquidity (Risk) Concepts: Definitions and Interactions (February 23, 2009). ECB Working Paper No. 1008, Available at SSRN: https://ssrn.com/abstract=1333568 or http://dx.doi.org/10.2139/ssrn.1333568

Kleopatra Nikolaou (Contact Author)

European Central Bank (ECB) ( email )

700 19th str
Washington, DC 20431
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
4,155
Abstract Views
10,151
Rank
4,597
PlumX Metrics