What is liquidity risk in Faster Payments systems?

Liquidity risk in Faster Payments systems refers to the risk that a counterparty does not have sufficient funds available to meet its obligations when they are due. This risk is particularly significant in payment systems where transactions occur quickly, often in real-time or near real-time. If an entity lacks the necessary liquidity at the moment a transaction needs to be completed, it can lead to failures in processing payments, disrupt the flow of funds, and potentially impact trust in the payment system.

In the context of Faster Payments, liquidity is crucial because the system’s efficiency and reliability depend on the ability of participants to readily access and use their funds for immediate transactions. Therefore, effective liquidity management is essential to ensure smooth operations and to mitigate the risks arising from potential cash flow issues.

The other options represent different types of risks that may be encountered in financial systems but do not specifically pertain to liquidity risk. Delayed transactions relate to timing and operational efficiency rather than the availability of funds. Currency exchange issues focus on the complications arising from converting one currency to another, which, while important in international payments, do not directly define liquidity risk. Data breaches involve the unauthorized access or compromise of sensitive information, emphasizing cybersecurity rather than the financial solvency of participants in a payment system.