Liquidity risk can only arise on the asset side of an FI's balance sheet as this means that the FI does not hold enough liquid assets such as cash or liquid securities.

Question

Quizplus · Accepted Answer

Liquidity risk can arise on both the asset and liability sides of an FI's balance sheet. On the asset side, liquidity risk occurs when an FI holds illiquid assets that cannot be sold or easily converted into cash to meet obligations as they arise. On the liability side, liquidity risk occurs when an FI faces a sudden demand for withdrawals or repayment from depositors or creditors and does not have sufficient liquid funds to meet those demands.

Liquidity Risk Can Only Arise on the Asset Side of an FI's