One cause of liquidity risk occurs when customers of an FI pay down their lines of credit.

Question

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Liquidity risk primarily arises from an FI's inability to meet its obligations when they come due without incurring unacceptable losses, often due to an inability to convert assets into cash or borrow funds. Customers paying down their lines of credit actually provide the FI with more liquidity, not less, reducing liquidity risk.

One Cause of Liquidity Risk Occurs When Customers of an FI