Download or read book Illiquidity Component of Credit Risk written by Stephen Morris and published by . This book was released on 2016 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: We describe and contrast three different measures of an institution's credit risk. "Insolvency risk" is the conditional probability of default due to deterioration of asset quality if there is no run by short term creditors. "Total credit risk" is the unconditional probability of default, either because of a (short term) creditor run or (long run) asset insolvency. "Illiquidity risk" is the difference between the two, i.e., the probability of a default due to a run when the institution would otherwise have been solvent. We discuss how the three kinds of risk vary with balance sheet composition. Illiquidity risk is (i) decreasing in the "liquidity ratio" - the ratio of realizable cash on the balance sheet to short term liabilities; (ii) decreasing in excess return to debt; and (iii) increasing in the solvency uncertainty - a measure of ex post variance of the asset portfolio. Increasing the liquidity ratio has decreasing returns to reducing illiquidity risk.