Liquidity risk is used to describe two quite separate kinds of risk: funding liquidity risk and market liquidity risk.

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Funding liquidity risk is the risk that covers the risk that a firm cannot access enough liquid cash and assets to meet its obligations. Funding liquidity risk threatens all kinds of firms. For example, many small and fast-growing firms find it difficult to pay their bills quickly enough while still having sufficient funds to invest for the future. Banks have a special form of funding liquidity risk because their business involves creating maturity and funding mismatches. One example of a mismatch is that banks aim to take in short term deposits and lend the money out for the longer term at a higher rate of interest. Sound asset/liability management (ALM), therefore, lies at the heartening of the banking business to help reduce the risk. There are various techniques involved in ALM, including gap and duration analyses.Of course, banks sometimes get it wrong, with disastrous consequences. Many of the banks that failed during the 2007-2009 global financial crisis had built up large maturity mismatches and were vulnerable to the wholesale funding market's perception of their creditworthiness.

 

Market liquidity risk, sometimes known as trading liquidity risk, is the risk of a loss in asset value when markets temporarily seize up. If market participants cannot, or will not, take part in the market, this may force a seller to accept an abnormally low price, or take away the seller's ability to turn an asset into cash and funding at any price. Market liquidity risk can translate into funding liquidity risk overnight in the case of banking institutions too dependent on raising funds in fragile wholesale markets. It can be very difficult to measure market liquidity risk. Measures of market liquidity in a normal market, for example, might look at the number or volume of transactions and at the spread between the bid-ask price. However, these are not necessarily good indicators that a market will remain liquid during a time of crisis. 

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Given case study will provide a overview regarding impact of liquidity risk-

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Nigeria has a long and sad history of bank failures. The problem became worse in the 1990s when many banks failed and in 2011 when several hitherto strong banks failed due to largelypoor bank liquidity risk management. The Central Bank of Nigeria spent over US$6.8bn in

purchasing the non-performing loans) of the failed banks.

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In fact, in the last few years the Central Bank of Nigeria and the Asset Management Corporate of Nigeria have been preoccupied in a bazaarof non-performing loans. Banks as custodians of depositors funds are expected to exercise due care and prudence in their lending activities and with regard to bank liquidity risk management best practice. This study was designed to asses the relationship between poor bank

liquidity risk management and bank failures.

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Bank liquidity risk is a risk of loss to a bank arising from a bank not having adequate funds to meet deposit withdrawals and loan demands. The survey research design was deployed for the study. Data were generated from both primary andsecondary sources. Reliability for the instrument used for the collection of data was calculated at 0.93 through the Cronbach’s Alpha technique. Coded data were analyzed by descriptive statistics and the Pearson’s correlation methods. The result of correlation was r = .993*, which

meant that poor bank liquidity risk management has strong positive relationship with bank failures.