For instance, a market participant may not be able to sell a security or liquidate a position due to lack of buyers. Similarly, firms (but also households) face the risk of being unable to obtain enough cash to meet their obligations. This funding liquidity risk is particularly relevant for banks since their core business involves the maturity transformation of funds.
Indeed, the traditional activity of banks consists of providing liquidity transformation services, by collecting short-term deposits in order to finance the provision of loans with longer maturities. As a result, banks intrinsically face a maturity mismatch in their balance sheets that exposes them to funding liquidity risks.