Question
Which of the following is the risk when a bank fails in
honoring the commitment of payment of deposits to the customers due to inability to meet cash flow obligations?Solution
Liquidity Risk arises when a bank is unable to meet a financial commitment. This may arise due to variety of reasons. The entity may not be able to raise resources at reasonable cost. This may also arise when a bank is not able to exit an investment due to non-availability of counter party in the market resulting in impacting the liquidity of the bank in meeting its commitments.
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