LIQUIDITY RISK
LexInter | July 13, 2019 | 0 Comments

LIQUIDITY RISK

The liquidity risk concerning a debtor is the risk of not having the necessary funds to meet its commitments when they fall due.

The liquidity risk concerning securities is the risk of not being able to sell them quickly under satisfactory conditions.

The liquidity risk is a fundamental factor of solvency for companies taking into account the criterion of cessation of payments for the opening of bankruptcy proceedings. The suspension of payments is in fact the possibility of paying the due liabilities with liquid receivables. Liquidity risk therefore turns very directly into solvency risk.

The liquidity of a market is its capacity to absorb transactions for a given volume without significant effect on prices.

The financial crisis resulting from the subprime mortgage crisis led to a liquidity crisis in the credit market. Asset-based securitization techniques supposed to guarantee debt did not take liquidity risk into account.

With the subprime crisis, the value of financial assets has fallen, and the “mark to market” rule has led to a chain of depreciation and therefore a contamination of valuations. The buyers only wanting to buy at the market price, which corresponds to a market logic, and this not appearing acceptable to the seller, there was a liquidity crisis.

This liquidity crisis affected banks and asset management companies.

The banks no longer wanted to lend each other. It should be noted that banks are structurally in a risky liquidity position. The amount of sight deposits is in fact significantly higher than that of their liquid assets.

The FED and the ECB were forced to practice massive injections of liquidity and repurchases of securities by acting as “buyers of last resort”. For example, the Fed has swapped real estate loans for Treasury bills.

As far as management companies are concerned, they have been confronted with massive outflows of capital.

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