So what assets are held by banks to manage liquidity risk? Well, cash is an excellent source of liquidity since it can be directly used to meet any obligations of the bank. Cash can be either actual cash already stored in bank accounts, or it can be a cash equivalent, which means the cash can be generated through the sale of short term high quality securities, which generally have a maturity of less than 90 days.

On the bank's balance sheet, such sources of liquidity are generally indicated by the item cash and cash equivalents. However, cash and cash equivalents don't generate a very high rate of return, so banks don't want to hold too much cash when it can be used more productively somewhere else, earning a higher rate of return, meaning there is a tension within the bank between holding more of its assets as cash to provide more mitigation against liquidity risk, and alternatively using the cash in more risky ways, such as issuing loans, which will generate more returns for the bank's shareholders. This chart shows that it is common for banks to hold between 10 and 20% of their assets in cash and cash equivalents.

These significant amounts of cash are held to provide liquidity in times of crisis.