One effective strategy for managing liquidity risk is to:

Maintaining a diversified funding base is a fundamental strategy for effectively managing liquidity risk. This approach ensures that an organization does not rely on a single source of funds, which can be vulnerable to abrupt changes or market conditions. By spreading funding across various sources, such as different banks, capital markets, and financial instruments, an entity can better withstand financial pressures and unexpected demands for liquid assets.

Having a diversified funding base allows an organization to tap into multiple streams of capital, thereby enhancing stability and reducing the likelihood of experiencing a liquidity crunch. It creates a safety net that helps the organization respond more flexibly to various scenarios, like changes in borrower confidence or market fluctuations.

In contrast, investing all funds in a single security increases exposure to the risk associated with that security and creates potential liquidity issues if the market for that security becomes illiquid. Reducing cash reserves can leave an organization vulnerable in times of heightened liquidity needs, while limiting access to credit facilities constricts available options when sudden liquidity needs arise. Therefore, a diversified funding base stands out as a robust approach to managing liquidity risks effectively.