What is the purpose of a liquidity risk management framework?

The purpose of a liquidity risk management framework is centered around maintaining sufficient liquidity in times of financial stress. This involves ensuring that an organization can meet its short-term financial obligations without incurring significant losses. Liquidity risk arises when an entity is unable to efficiently liquidate assets or obtain funding to meet these obligations, particularly under unfavorable market conditions.

A robust liquidity risk management framework typically includes strategies and tools to identify, measure, monitor, and control liquidity risk. It helps organizations prepare for scenarios where cash flows may be disrupted, thus ensuring stability and continuity of operations.

Maximizing profit during stable periods, assessing long-term investment returns, and ensuring compliance with tax regulations, while important in their own contexts, do not directly address the core needs of liquidity management during stressed conditions. The primary goal is to provide the necessary funds when they are most needed, preserving the organization's financial integrity and operational viability in challenging times.