Liquidity at Risk (LaR)

Liquidity at Risk (LaR) is a risk management metric that quantifies the potential shortfall in liquidity over a specified period under normal or stressed market conditions. It measures the likelihood that an institution may not have enough liquid assets to meet its obligations when due, particularly in times of financial stress. LaR is used by financial institutions to assess their liquidity risk and ensure they maintain adequate liquidity buffers to withstand adverse conditions.

Example

A bank calculates its Liquidity at Risk to estimate how much liquidity it could lose in a severe market downturn, ensuring it holds enough reserves to cover short-term liabilities.

Key points

• A risk management metric that quantifies potential liquidity shortfalls under normal or stressed conditions.

• Helps financial institutions assess their ability to meet short-term obligations.

• Used to ensure adequate liquidity buffers during adverse market conditions.

Quick Answers to Curious Questions

What does Liquidity at Risk (LaR) measure?

It measures the potential shortfall in liquidity that a financial institution may face over a specific period, particularly in times of market stress.