Systemic Liquidity Risk : A Macroeconomic Evaluation

The likelihood of not getting the desired funding at an appropriate cost or the probability of bearing an undue loss of value in a fire sale is recognized as liquidity risk. However, a flat idiosyncratic liquidity risk does not necessarily translate into a similar risk-neutral position at the systemic level. Systemic liquidity risk emanates from the underestimation and imprecise understanding of the liquidity conundrum and its causal relationship with the exogenous or endogenous factors. Systemic risk finally devolves at the macro level with serious repercussions. The present paper attempts a macroeconomic evaluation of the systemic liquidity risk from the perspective of developing economies. As a test case, the relevant macroeconomic data from the Indian financial system has been used for the purpose of analysis, modeling and interpretation