1. 30) A bank should define and identify the liquidity risk it is exposed to in all jurisdictions in which it operates directly or through its subsidiaries, branches and related entities. A bank should evaluate each major on and off balance sheet position, including contingent exposures that may affect the bank’s sources and uses of funds, and determine how it can affect liquidity risk.
2. 31) A bank should consider the interactions between exposures to funding liquidity risk and market liquidity risk¹. A bank that obtains liquidity from capital markets and interbank markets should recognize that these sources may be more volatile than traditional retail deposits. For example, under conditions of stress, investors in money market instruments may demand higher compensation for risk, require roll over at considerably shorter maturities, or refuse to extend financing at all. Moreover, reliance on the full functioning and liquidity of financial markets may not be realistic as asset and funding markets may dry up in times of stress. Market illiquidity may make it difficult for a bank to raise funds by selling assets and thus increase the need for funding liquidity.
3. 32) A bank should ensure that assets are prudently valued according to relevant financial reporting and supervisory standards. A bank should fully factor into its risk management the consideration that valuations may deteriorate under market stress, and take this into account in assessing the feasibility and impact of asset sales during stress on its liquidity position.
4. 33) A bank should recognize and consider the strong interactions between liquidity risk and the other types of risk to which it is exposed. These include interest rate, credit, operational, legal and reputational risks, which may influence a bank’s liquidity profile. Liquidity risk often can arise from perceived or actual weaknesses, failures or problems in the management of other types of risk. A bank should identify events that could have an impact on market and public perceptions about its soundness, particularly in wholesale markets.

¹ See paragraph 6 for definitions of funding liquidity risk and market liquidity risk.