How Commercial Banks Manage Risks Through Liquidity Governance

Abstract

Commercial banks face inherent liquidity risks due to their business model of transforming short-term liabilities into long-term illiquid assets. This makes effective liquidity management a survival imperative during stress periods. Over the past two decades, particularly in the aftermath of the 2007–2009 global financial crisis, regulatory reforms such as Basel III have compelled banks to adopt more dynamic and integrated liquidity governance frameworks. These frameworks balance the need to maintain adequate high-quality liquid assets against the opportunity costs of holding low-yield assets. This literature review synthesizes empirical and conceptual work on liquidity risk management in commercial banks, emphasizing three core pillars: (1) dynamic measurement approaches, (2) asset–liability management techniques integrated with corporate governance, and (3) regulatory oversight aligned with macroeconomic conditions. It further contributes to theory by proposing a three-dimensional liquidity governance framework that bridges fragmented discussions in existing research and explains how institutions navigate trade-offs between liquidity, profitability, and institutional constraints.