Liquidity risk manifests when cash inflows are insufficient to cover outflows, forcing asset sales at unfavorable prices or default on obligations. Financial institutions face funding liquidity risk (inability to meet liabilities) and market liquidity risk (inability to trade assets without moving prices). The 2008 financial crisis demonstrated how quickly liquidity can evaporate, with banks unable to access credit markets despite holding assets. Managing liquidity risk involves cash flow forecasting, maintaining liquid asset buffers, diversifying funding sources, stress testing under adverse scenarios, and establishing contingency funding plans and credit facilities.