Chapter 12
Liquidity and Operational Risk
Liquidity and operational risk are extremely important, but in some respects more difficult to analyze and understand than market risk or credit risk. For one thing, they are both hard to conceptualize and difficult to quantify and measure. This is no excuse to give them short shrift but it does mean that the quantitative tools for liquidity and operational risk are not as developed as for market risk and credit risk. This also means that judgment and experience count—it reinforces the idea that risk management is management first and foremost.
I cover liquidity and operational risk in less depth than market and credit largely because they are at an earlier stage of development, and not because they are any less important. In fact, both are critically important. Issues around liquidity risk come to the fore during periods such as the crisis of 2007–2009. The events during that period reflected the bursting of an asset bubble, but the events were combined with, or more correctly generated, a consequent liquidity crisis.1
