For many financial organizations, liquidity management has gone from a back-office treasury task to a board-level priority. Growing regulatory scrutiny alongside elevated interest rates has made the practice an increasingly high-stakes balancing act.
This guide provides a framework for managing these competing pressures. We’ll explore the metrics authorities examine, how to assess liquidity from a strategic angle, and practical tools that can help structure planning.
What Is Liquidity Management?
Liquidity management is the practice of ensuring your organization has enough cash and cash equivalents to meet its short-term obligations. It stands in contrast with solvency management, which focuses on meeting obligations beyond one year.
In many cases, liquidity goals are in direct competition with profitability targets. Deploying capital is necessary for growth, but doing so too aggressively can erode your cash reserves and increase the risk of shortfalls.
This equilibrium is especially delicate in the context of financial services and institutions. Organizations like banks, fintech companies and asset managers have more complex liquidity needs due to regulatory requirements.
Liquidity Management Pressures
Managers of financial organizations have long had to balance stability and returns. Some liquidity is necessary to meet obligations and regulatory minimums, but too much can lead to underfunding and create a drag on profits.
With interest rates remaining relatively elevated in 2026, the opportunity cost of holding idle cash is especially significant. Every dollar sitting in reserve is one you don’t get to put toward high-returning investments.
On the other hand, the regulatory pressure to maintain liquidity has increased since the 2023 banking crisis, in which three major financial institutions failed in quick succession: Silicon Valley Bank, Signature Bank and First Republic Bank.
This demonstrated the risk of digital banking, which allows for “silent” bank runs, where depositors make withdrawals remotely rather than in person. These can rapidly deplete reserves even when institutions are well capitalized.
As a result, many regulators are now even more focused on ensuring that financial organizations can survive sudden withdrawal surges and other disruptions.
How Regulators Assess Liquidity Management
The regulators responsible for assessing liquidity risk vary by institution. For example, the Office of the Comptroller of the Currency (OCC) helps oversee banks, while the Financial Industry Regulatory Authority (FINRA) supervises broker-dealers.
Each agency has specific mandates, but they share a common goal: ensuring subjects can survive stress events without outside help. For example, SEC Rule 22e-4 requires certain investment companies to have liquidity risk management programs that include:
- Board oversight
- Limitation on illiquid investments
- Determination of a highly liquid investment minimum
- Classification of the liquidity of fund portfolio investments
- Assessment, management and periodic review of a fund’s liquidity risk
Regulators also conduct ongoing audits and assessments to help ensure that financial organizations are complying with these requirements. For example, this commonly involves testing for a minimum liquidity coverage ratio (LCR) of 100%.
Introduced in Basel III—the latest expansion of international banking standards called the Basel Accords—the LCR equals an organization’s high-quality liquid assets (HQLA) divided by its expected net cash outflows over a 30-day stress scenario.
HQLA refers to assets that you can easily convert to cash with minimal loss in value. For example, that may include physical cash, central bank reserves, U.S. Treasury securities and certain investment-grade corporate bonds.
Pro Tip: The OCC’s 2019 Tailoring Rule reduced LCR requirements for certain banks deemed lower risk to 70% or 85%. This may have contributed to the 2023 banking crisis, inspiring some to call for stricter standards.
How Finance Leaders Should Assess Liquidity Management
While regulatory minimums can help you survive, they don’t guarantee the liquidity you need to drive profitability. As a finance leader, your liquidity framework should balance compliance with the need to deploy capital for growth.
This requires monitoring additional metrics, like the efficiency ratio. Calculated by dividing non-interest expenses by total revenue, it measures how much of your income is consumed by the cost of doing business.
For example, a 60% efficiency ratio means you spend $0.60 to earn a dollar, giving you a significant cash-flow cushion. If withdrawals were to spike unexpectedly, it would help you satisfy depositors without freezing lending or pulling back on growth initiatives.
Similarly, the cost-to-revenue ratio offers a more conservative view by factoring in interest expenses. It can help you recognize when rising funding costs are eroding liquidity and shrinking your margin for error.
For example, say your company’s cost-to-revenue ratio has steadily increased to 90%. With margins that thin, even a modest disruption could force you to liquidate high-returning assets at a loss to maintain liquidity levels.
Monitoring these financial ratios helps support more disciplined tradeoffs. When efficiency is strong, you can deploy capital more aggressively. When it weakens, you may need to hold larger cash reserves to protect against volatility.
Balancing Liquidity and Growth
Beyond monitoring various metrics, finance leaders should take proactive steps to strike a balance between liquidity and growth. In many cases, cost optimization is one of the best places to start.
By reducing overhead—such as by automating manual processes or consolidating tech stacks—you lower your expected cash outflows. This improves your LCR and allows you to maintain a smaller, more efficient liquidity buffer.
Shifting toward a more proactive approach to financial planning is also important. For example, enhancing forecasting with real-time data helps you see exactly how much cash is truly excess. Instead of leaving that money idle, you can deploy it confidently.
Financial scenario modeling can be a similarly invaluable tool. It involves creating several what-if simulations to see how different market conditions might impact your cash position. Generally, you should examine three main scenarios:
- Downside: A stress event, like a sudden withdrawal surge
- Base case: Your standard, expected growth plan
- Upside: A hyper-growth scenario where you expand faster than expected
In this context, one of the primary advantages of scenario modeling is that it lets you stress-test potential growth targets against actual cash reserves. Then you can make strategic adjustments accordingly.
For example, say you determine that your expected growth rate actually threatens to push your fintech’s liquidity below acceptable levels. You could adjust your strategy and secure more funding before attempting to expand.
The CFO’s Role in Liquidity Management
In cash and liquidity management, the CFO serves as an essential bridge between competing needs. While risk management teams focus on safety and sales teams focus on growth, the CFO must craft a strategy that satisfies both.
CFOs are also responsible for implementing liquidity audit insights. Rather than viewing regulatory exams as a hurdle, they use feedback to revise practices and strengthen internal controls, helping to ensure long-term stability and align leadership.
Without a CFO, these responsibilities can quickly overwhelm a standard finance department. For example, many fintechs and lenders operate with just a controller, who may lack regulatory experience or liquidity modeling skills.
The gap between managing the books and strategic liquidity leadership is significant. Without a dedicated leader, financial organizations may hold too much idle cash or fail to meet requirements during a high-stakes regulatory exam.
Manage Liquidity With Fractional CFO Support
Increased regulator scrutiny and stubbornly high interest rates have made managing liquidity a strategic leadership responsibility. Balancing compliance and stability with growth requires deep expertise across multiple areas, including audit readiness and financial modeling.
If your internal teams are at capacity or lack certain types of experience, an outsourced expert can help you bridge the gap. Use Paro’s strategic fractional CFO services to connect with a qualified expert whose skills are tailored to your unique needs.
