Liquidity risk is one of the major risks faced by banks in addition to credit risk,
market risk and operating risk. In this paper we construct a stylized model of bank
management where the asset and liabilities liquidity structure are a key element in
determining the bank's exposure to liquidity risk. The main results of our model are
that liquidity risk increases when competition in the credit market increases while
increasing competition in the deposit market will decrease the liquidity shortage. Our
results are of particular importance as banks face increased liquidity risk due to the
recent developments in the financial markets