The risk of being unable to meet obligations as they fall due, or of being unable to trade without a large price effect. The first is funding liquidity risk, the second market liquidity risk.
Where you will meet it
Liquidity risk comes up in 33 learning outcome notes across the FRM syllabus.
A few of them:
Banks FRM Part I · Financial markets and products
“A bank's principal risks are credit, market, operational and liquidity risk, with interest rate risk in the banking book as an important relative.”
The Building Blocks of Risk Management FRM Part I · Foundations of risk management
“Liquidity risk has two forms.”
Credit Scoring and Retail Credit Risk Management FRM Part II · Credit risk measurement and management
“Funding long fixed-rate mortgages with short deposits creates interest rate and liquidity risk, prepayment changes the cash flows, fraud and process failures create operational risk, and mis-selling or unfair practice creates conduct, legal and reputational risk.”
Liquidity Risk FRM Part II · Liquidity and treasury risk measurement and management
“Trading liquidity risk is the risk that a position cannot be closed quickly without a price concession.”
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