Many banks have a designated liquidity risk department to manage this risk. The role of a liquidity risk department or LRD is twofold. Firstly, since there are different types and sources of liquidity, they must ensure that the size and composition of the bank's liquid resources are adequate in amount and quality. Secondly, the LRD helps ensure that the bank's liquid risks are managed in a robust and sound manner to reduce the risk of the bank becoming insolvent, as well as ensuring adherence to regulations.

Following on from the Great Depression, Banking crises tend to be caused by runs on banks, triggered by credit losses banks were actually all rumored to be suffering. To deal with this issue, many countries introduced deposit insurance plans such as the Federal Deposit Insurance Corporation, or FDIC in the US introduced in 1933, which guaranteed the repayment of a certain amount of deposits held within a bank if it went bankrupt. This significantly reduced the risk faced by most retail depositors of losing their money if a bank was facing bankruptcy, which significantly reduced the number of bank runs.

This meant the issue of liquidity was not at the forefront of the minds of regulators. One consequence of this is that Basel I focused only on credit risk. However, the issue of liquidity risk was brought into renewed focus during the 2007 credit crunch and subsequent 2008 global financial crisis.

In 2007, Northern Rock, a UK Mortgage Bank ran into liquidity trouble as it struggled to refinance short-term borrowing in the wholesale in capital markets. Due to concerns about defaults on its assets, Northern Rock had been financing itself with short term financing. I.e. it had been borrowing money in the short term and was using that to issue longer term mortgages.

As a result, it was unable to sell off any of its assets, the mortgages to meet its liabilities when no one was willing to lend to them. This resulted in Northern Rock having to approach the Bank of England for funding when no one else was willing to lend to them.

In 2008, the global financial crisis was triggered by a collapse in the housing market. Many banks, such as Bear Stearns and Lehman Brothers invested heavily in mortgage backed securities or MBSs, where the owner of the MBS receives payments from mortgage holders. When mortgage defaults started increasing through 2008, this significantly reduced the value of the MBSs held by Lehman Brothers.

This reduction in assets reduced their equity levels leading to an increase in the level of indebtedness of the bank. To hit this off, Lehman Brothers tried to sell off its MBSs and other securitization assets to raise cash, but this just drove the prices down even further.

However, the issue remained that other banks knew Lehman Brothers were hugely exposed to the mortgage markets and didn't want to lend them money in the wholesale markets.

Ultimately, this led to Lehman Brothers being unable to raise cash for debt repayments resulting in its bankruptcy, even though at that point its assets were greater than its liabilities.