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Banks are also exposed to liquidity risk. This is the risk arising from depositors unexpectedly seeking to withdraw their funds from the bank. A bank can fail if it is unable to liquidate assets to meet these withdrawal demands.
We will look at the management of interest rate and foreign exchange risk in the next series of posts.
Commercial banks operate in the money markets, the bond and equity markets, the foreign currency markets and buy and sell derivatives for the underlying instruments in all of these markets. Treasurers also need to take into account expected and unanticipated new deposits and withdrawals, and drawdown and repayments on loans.
They are also constrained by regulatory requirements on capital adequacy and reserve deposits. Banks unable to meet reserve requirements may buy Repos, borrow from other commercial banks or borrow from the central bank through its discount window.

Treasuries of major banks take positions in many different instruments in order to manage the preceding three risks and to try to profit from market movements. This leaves them exposed to market risk.

International banks take deposits and make loans in many different currencies. They also actively trade currencies on their own behalf and for their customers. This can create risks that the bank’s position will be negatively affected by changes in foreign exchange (FX) rates between currencies.