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This is an example of liquidity risk as when a rumor starts that a bank has suffered significant losses and may not be able to honor its promises to depositors .
What is Liquidity Risk ?
A financial risk known as liquidity risk states that for a specific amount of time, a particular financial asset, security, or commodity may not be exchanged in the market rapidly enough to avoid affecting the market price.
Liquidity risk occurs when a party wanting to trade an asset is unable to do so because no one else on the market wants to deal for that asset. Since it impacts their capacity to trade, liquidity risk becomes especially significant to parties that are planning to hold or already possess an asset.
The way that liquidity risk manifests itself is fundamentally different from a price decline to zero. If an asset's price falls to zero, the market is signaling that the asset has no value. However, if one party is unable to connect with another party who is eager to trade the asset, this may simply be an issue of market players connecting with one another. This is why emerging markets or markets with little volume tend to have more liquidity risk.
To learn more about Liquidity Risk checkout the link below :
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