Liquidity means the ability of a firm to honor its financial obligations. Therefore the risk that a financial institution will not be able to repay its obligation to its creditors when they demand their fund from their bank account.
An especial event called ‘bank run’ is a great example of how liquidity risk can push forward a FI (Financial Institute) to meet immature death i.e. bankruptcy. During late 1980s one of an unexpected depositor came to a bank withdraw money from his account. The amount was large, the bank failed to honor the withdrawal demand. Soon other depositor felt that, the bank is in crisis. They followed to the bank and demanded fund from their respective accounts. More people joined them. The rule of first come first serve was a fear factor. Soon the bank faced great trouble. Finally the bank run away i.e. faced bankruptcy.