Liquidity is easiest to underestimate when markets are calm. Assets trade, funding rolls over and bid-ask spreads remain narrow, creating the impression that cash can be raised quickly whenever it is needed. The difficulty is that liquidity is not a fixed property of an asset or market. It is a condition that can change precisely when demand for it becomes greatest.
That problem is becoming more important as financial markets grow more interconnected and as nonbank institutions play a larger role in credit, investment and market-making. The Financial Stability Board’s work on non-bank financial intermediation highlights how leverage and liquidity mismatches can amplify market stress when financing conditions tighten.
The consequence for investors, treasurers and financial institutions is subtle: the cost of liquidity is rising even before a crisis occurs. It appears in higher liquidity buffers, more collateral, shorter financing structures, diversification costs and the opportunity cost of keeping assets readily saleable.
Liquidity is a state, not a label
An asset described as liquid can become difficult to sell at a reasonable price if many investors try to exit simultaneously. That is why market depth, dealer capacity, investor concentration and financing conditions matter as much as normal trading volumes.
The IMF’s October 2025 Global Financial Stability Report examined vulnerabilities in foreign-exchange and sovereign-bond markets, including the way funding stress and nonbank participation can transmit shocks. The lesson extends beyond those markets: liquidity depends on the balance between buyers and sellers at the moment a transaction is required.
This is also why portfolios can look diversified while sharing the same liquidity risk. Different assets may all depend on the same dealers, the same repo markets or the same investor base. Correlations can rise when financing conditions tighten because investors sell what they can, not only what they want to.
Nonbanks have changed the transmission mechanism
That problem is becoming more important as financial markets grow more interconnected and as nonbank institutions play a larger role in credit, investment and market-making. The Financial Stability Board’s work on non-bank financial intermediation highlights how leverage and liquidity mismatches can amplify market stress when financing conditions tighten.
A fund may promise investors frequent dealing while holding assets that cannot be sold quickly without discounts. A leveraged investor may be forced to post additional collateral after a market move. A dealer may reduce balance-sheet usage as volatility rises. Each action is rational individually but can remove liquidity from the market collectively.
For corporate treasurers, the implication is that market access should not be assumed from historical averages. Funding plans need to consider who is likely to provide liquidity under stress and what those providers themselves depend on.
The hidden price of holding cash
Liquidity buffers are costly because safe, short-duration assets may yield less than riskier alternatives. But the opportunity cost is only one part of the calculation. Cash also reduces the probability that an investor or business will have to sell long-term assets at distressed prices or accept expensive emergency financing.
That creates a form of insurance value. The appropriate buffer depends on the volatility of cash flows, the reliability of credit lines, the maturity of liabilities and the speed with which assets can be monetised. A company with stable recurring revenue can carry less liquidity than one with volatile working-capital needs and concentrated debt maturities.
For funds, the same logic connects redemption terms with portfolio liquidity. IOSCO’s work on investment management has increasingly focused on liquidity risk management, valuation and investor protection as asset-management structures evolve.
Collateral is part of the liquidity equation
Modern financial markets are heavily collateralised. Derivatives, repo and secured funding can reduce counterparty risk, but they also create liquidity needs when collateral values move or margin requirements rise.
The BIS Quarterly Review regularly analyses market structure, funding and derivatives conditions. One recurring lesson from periods of stress is that a solvent institution can still face serious pressure if it cannot mobilise eligible collateral quickly enough.
This is why collateral transformation, settlement timing and operational readiness matter. Liquidity management is not only about the quantity of assets on a balance sheet. It is also about whether those assets can be pledged, transferred and valued when needed.
Central-bank backstops do not eliminate private responsibility
Central banks can provide extraordinary liquidity during systemic stress, but private institutions cannot build their normal funding models around the assumption that official support will always be available. The IMF’s work on liquidity stresses in nonbank financial intermediaries discusses the circumstances in which central-bank interventions may be used to restore market functioning.
The existence of a backstop can stabilise expectations, but access conditions, eligible collateral and policy objectives can differ across jurisdictions and crises. Institutions therefore need to manage liquidity on a going-concern basis, with emergency facilities treated as a last line rather than the first line of defence.
Liquidity deserves its own return calculation
Finance often evaluates assets by yield, duration and credit risk. Liquidity should be treated with similar discipline. A higher-yielding asset may be less attractive once the cost of funding, haircuts, redemption commitments and potential liquidation discounts are included.
The same applies at corporate level. A longer-dated debt structure may cost more in headline interest expense but reduce refinancing risk. A committed credit facility may carry fees even when unused but provide valuable certainty. A larger cash buffer may depress returns on capital while increasing the ability to invest during a downturn.
These are not simply conservative choices. They are decisions about the value of time. Liquidity buys management time when markets are moving faster than balance sheets can adjust.
What this means
The cost of liquidity is becoming more visible because the financial system is more interconnected and because many investors rely on the same markets for funding, hedging and exit. In calm conditions, those connections make finance efficient. Under stress, they can become channels of contagion.
For investors and companies, the practical response is not to maximise cash. It is to understand how quickly obligations can arrive, how reliable sources of funding really are and what happens if assets must be sold into a falling market. Liquidity is expensive until the moment it becomes indispensable.
References
• IMF — Global Financial Stability Report, October 2025
• IMF — Addressing Market Dysfunction and Liquidity Stresses in NBFIs
• Financial Stability Board — Non-bank financial intermediation