Within the financial sector, financial institutions face various forms of risk. Financial institutions must effectively manage and manage these various risks to maintain stability and remain competitive. For example, financial institutions may face default risk compared to the risk associated with exchange rates. However, not all financial institutions face all types of risk. Furthermore, when financial institutions share the same risks, they may not do so to the same degree. Some financial institutions may face higher interest rate risk while others will face higher default risk. This paper will focus on liquidity risk. Through an analysis of three different types of financial institutions and their level of liquidity risk, you will be able to better understand liquidity risk, its impact on financial institutions and how it can be mitigated. When studying liquidity risk, the most important task is to understand what it entails. Saunders and Cornett (2011) and LeJeune (2010) noted that liquidity risk is the risk of an unexpected increase in liability draws that would require a financial institution to liquidate its assets quickly and at a lower-than-expected rate, also known as passivity. -lateral risk. Furthermore, liquidity risk can be an asset-side risk that results in the hasty exercise of off-balance sheet assets, such as lines of credit, forcing the financial institution into liquidation (LeJeune, 2010; Saunders & Cornett, 2011). Additionally, liquidity risk can result from a financial institution's actual or perceived failure to meet its contractual commitments (Board of Governors, n.d.). Liquidity risk management is not an outlier for financial institutions as they manage... middle of paper ...... Principles for sound liquidity risk management and supervision, 1-38. Retrieved from http://www.bis.org/publ /bcbs144.htmBoard of Governors of the Federal Reserve System (Board of Governors). (n.d.). Supervisory policies and guidance topics: liquidity risk management. Retrieved December 22, 2013, from http://www.federalreserve.gov/bankinforeg/topics/liquidity_risk.htmLeJeune, AT (2010). Risks faced by financial institutions: liquidity, foreign exchange and sovereign risks. International Journal of Academic Affairs, 4(2), 31-37. Retrieved from http://jwpress.com/Saunders, A., & Cornett, M. M. (2011). Managing Financial Institutions: A Risk Management Approach (7th ed.). New York, NY: McGraw-Hill/Irwin.Turner, S. H. (2011). What we learned about risk control (cover story). Bank Manager, 21(4), 40-45. Retrieved from http://www.bankdirector.com/