Liquidity refers to the ability to meet due obligations. It is the conversion of assets into cash within a year. Banks are highly leveraged institutions. When the bank is unable to liquidate its assets in case of need, it is running a liquidity risk. The liquid asset of a bank balance sheet comprises the following;

Core deposits; constitute the demand liabilities, savings accounts, and money market borrowings. The greater the volume of core deposits, the lower the unexpected withdrawal.

Treasury bills; are considered the most secured and readily saleable current assets on the bank balance sheet. Bank purchase short-term securities both for income and to achieve liquidity requirements.

Trading securities and securities available for sale; gilt edge securities on the balance sheet of a bank provide a robust fallback in a case of liquidity crunch.

Repurchase agreements; these agreements are secured low-risk marketable securities that strengthen the liquidity position of banks.

Current due from borrowers; principal and interest receivables support liquidity.

Bank liquidity is the state of affairs where the bank cannot convert its assets into cash with no or minimal losses.  The liquidity risk arises when the bank is either unable to liquidate its current assets or unable to raise new borrowings from the market. Liquidity turns out to be the greatest risk when banks cannot anticipate the new loan demand in the market or expected withdrawal by the depositors. The liquidity position is worsened when banks have no access to new sources of cash.