Unanticipated withdrawals by liability holders are a major part of liquidity risk.

Question

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Unanticipated withdrawals by liability holders, such as depositors, are a significant source of liquidity risk for financial institutions. In times of stress, if liability holders start withdrawing their funds, the institution may face a liquidity shortfall and may need to sell assets or borrow funds at unfavorable terms to meet its obligations. Thus, managing liquidity risk is crucial for the financial soundness of banks and other institutions.

Unanticipated Withdrawals by Liability Holders Are a Major Part of Liquidity