In another example, Xcel Energy, the fourth-largest energy company in the United States, with a delivery network in thirteen states, outsources its IT functions to IBM.Why would Xcel Energy duplicate the capabilities of one of the largest information technology companies in the world when they can partner with them, receive their expertise and knowledge, and spend less for the service?

Let me cite one more example. I once worked with two partners who were in the mortgage banking business. In that business there are many players, each with a specialized role. There are closers who close a real estate transaction, lenders who loan the money, mortgage servicers who handle the loan, and mortgage custodians who manage the documents. This case involved mortgage servicers and mortgage custodians.

The servicers handle customer calls, accept and apply payments, and pay escrowed taxes and insurance for the mortgagee. The custodians file and store the documents and then, when they’re needed, ship them to appropriate locations—a cumbersome process considering the thousands of real estate transactions that occur every day.

While liquidity risk is primarily a function of the willingness and ability of banks and brokers to provide liquidity and of investors’ readiness to take on risk, in other words, risk appetite, the other two points are related to the economic environment. The companies’ ability to generate sufficient cash flows to service their liabilities is central for the probability of default and is reflected in ratings. In general slowing economic growth, usually coupled with lower private consumption due to weak growth of labor income and rising unemployment undermines the profitability of the corporate sector.

In this context, it is worth remembering the definition of a recession. Market participants often define recessions in terms of two consecutive quarters of decline in real GDP. The National Bureau of Economic Research (NBER) which is responsible for dating recession periods, however, claims that recessions are characterized by a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale–retail sales.