Liquidity risk
Liquidity risk is the risk that a firm will not have enough funds to meet its obligations when they fall due, even if it is solvent and could pay later. For payment firms it shows up as payouts that cannot be funded in time in a particular currency or corridor.
How it works
The CPMI separates liquidity risk from credit risk: with liquidity risk the counterparty pays, just not when expected. The Basel Committee defines liquidity as a bank's ability to fund increases in assets and meet obligations as they come due without incurring unacceptable losses. It notes that a shortfall at a single institution can have system-wide repercussions.
Banks hold buffers by rule. The Basel III Liquidity Coverage Ratio requires enough unencumbered high-quality liquid assets to cover a 30-calendar-day stress scenario, with a 100% minimum from 1 January 2019. The Committee's 2008 principles also call for a formal contingency funding plan with clear escalation procedures that is regularly tested.
Payment firms carry liquidity risk currency by currency. Dollars in a US bank account cannot become pesos on a Saturday, when the FX market is closed and US bank transfer systems do not settle. Remitly lists failures or liquidity strains at banks holding its funds, or its partners' prefunding accounts, among the events that could stop it moving funds on time. The usual responses are buffers, committed credit lines and more than one funding route.
Example
A firm holds $10,000,000 in total but only MXN 4,000,000 at its Mexican partner. Weekend payouts are forecast at MXN 9,000,000, and no peso top-up can settle until Monday. The firm is solvent but has an MXN 5,000,000 liquidity gap, which it covers by drawing on a partner credit line on Friday.
Frequently asked questions
How is liquidity risk different from credit risk?
Credit risk is the risk a counterparty never pays in full. Liquidity risk is the risk it pays late, or that you cannot raise funds in time, even though value is there.
What is a contingency funding plan?
The Basel Committee describes it as the policies, procedures and action plans for responding to severe disruptions to a firm's ability to fund its activities in time and at reasonable cost.
Where Polynopsis fits
Polynopsis works out runway for every corridor and warns before one runs dry, so a shortfall in one currency is seen before payouts fail.
Compared with
Related terms
Sources
- A glossary of terms used in payments and settlement systems · Committee on Payments and Market Infrastructures, Bank for International Settlements
- Principles for Sound Liquidity Risk Management and Supervision (September 2008) · Basel Committee on Banking Supervision
- Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools (January 2013) · Basel Committee on Banking Supervision
- Remitly Global, Inc. Form 10-K for fiscal year 2025 · U.S. Securities and Exchange Commission (EDGAR)
Know where all your money is.
Polynopsis gives cross-border payment teams one live position across every bank, payout partner, exchange and wallet, including money in flight, and warns before a corridor runs dry.
About Polynopsis
Polynopsis is liquidity management software for cross-border payment companies. The name joins poly, many, and synopsis, a seeing together: one live view of money spread across many banks, payout partners, exchanges and stablecoin wallets, including money in flight, with a warning before any corridor runs dry.
Why it is called Polynopsis · About Polynopsis · Glossary · Corridor runway calculator