Liquidity risk is the risk that a bank or company cannot pay its bills when they come due — not because it is bankrupt, but because its money is tied up in assets that cannot be quickly sold or converted to cash.
Imagine a bank that has lent out $90 million of its $100 million in deposits as long-term mortgages. If depositors suddenly want to withdraw $20 million, the bank has a liquidity problem — its money is locked in 30-year loans.
The 2008 financial crisis was largely a liquidity crisis. Banks held mortgage-backed securities they could not sell, triggering panic. Since then, regulations like the Basel III Liquidity Coverage Ratio require banks to hold enough liquid assets to survive a 30-day stress scenario.