Liquidity risk is the risk that forced to borrow, or sell assets in a very short period of time.
The nature business of banks is turn the short-term deposits to the long-term funding. Therefore, banks will constantly face maturity problem. As such, banks is required to hold sufficient liquid assets in order to reduce liquidity risk and to avoid insolvency risk. According to Sardar Shaker Ibrahim (2017), liquidity is important on the profitability of Iraqi commercial banks. He found that any increase in liquidity ratios will lead return on assets (ROA) to increase as well. Also, Shahchera (2012) stand at a supporting view that there is a non-linear relationship between bank’s profitability and liquid assets holding on Iranian banks. The 2008 Subprime Mortgage Crisis was the biggest shock to the banking system since 1930s and thus raising the fundamental question about liquidity risk in the banking industry (Zuckerman, 2012).
In response, regulators are devising new liquidity standards with the aim of making the financial system more stable and resilient