What are “liquidity buffers”?

Liquidity buffers refer to the cash reserves and highly liquid assets that a financial entity maintains to ensure it can meet short-term obligations and absorb potential financial stress. These buffers provide a cushion during periods of economic strain, allowing institutions to weather unexpected demands for liquidity, such as sudden withdrawals or increased operational expenses.

This definition aligns with the correct choice, which emphasizes the importance of holding cash reserves for stability and flexibility in financial operations. A robust liquidity buffer helps maintain confidence in financial stability and operational continuity, which is critical during times of market volatility or economic downturns.

In contrast, other options do not effectively capture the essence of liquidity buffers. Immediate liquidation of assets, having liabilities that exceed assets, or focusing on high-return investment accounts do not serve the fundamental purpose of protecting an organization from financial distress by ensuring readily available cash or cash equivalents.