As UK universities enter January 2026, many treasury risk frameworks remain anchored to interest rates. This is increasingly the wrong place to focus. While interest rate risk dominated debate earlier in the decade, it is no longer the most material treasury risk facing the sector. The greater threats now sit in liquidity management, income volatility, counterparty concentration, and funding resilience.
This is not an argument that interest rate risk is irrelevant. It remains a factor that needs to be managed. The problem is that it continues to dominate reporting attention, despite being better understood, more visible, and less destabilising than other risks that are receiving far less scrutiny.
Interest rate risk is familiar
Following the rapid tightening cycle of the early 2020s, universities invested significant time in reviewing debt structures, fixing exposure, and debating rate scenarios. In many cases, portfolios are now largely fixed or supported by clear strategies. Committees are confident discussing the implications of further rate movements, even when those movements have limited impact on cashflow or covenant headroom.
The result is a continued focus on a risk that is already well controlled, while other, more complex risks are left underdeveloped in reports.
Liquidity risk is being misunderstood
Liquidity risk in universities is rarely about absolute cash levels, and more about timing. Many institutions continue to rely on headline cash balances as evidence of financial strength, without sufficient consideration of when cash is actually available to meet obligations.
International student fee income remains a central driver of liquidity, with receipts concentrated over short periods. Delays, disruptions, or shortfalls have an immediate impact on cash coverage, particularly where cost bases are relatively fixed. At the same time, persistent cost inflation has eroded flexibility, leaving less room to absorb adverse movements.
Despite this, liquidity stress testing often remains limited. This is a material weakness as liquidity risk can crystalise quickly and can undermine an institution’s financial stability.
Concentration risk remains largely unchallenged
University cash investment practices often prioritise simplicity and long-standing relationships. While operationally convenient, this can result in significant concentration risk, particularly where deposits are held with a small number of counterparties and treated as homogeneous.
Operational cash, strategic liquidity, and surplus funds are frequently grouped together, with limited differentiation in counterparty limits or maturity structures. Counterparty assessments are often static and backward-looking, rather than dynamic and exposure-driven.
Funding and covenant risk are being underestimated
Borrowing strategies in the sector have historically assumed that refinancing will be available when required. That assumption is becoming less robust. EBITDA volatility has increased across parts of the sector, driven by income uncertainty and rising costs. For institutions with covenant-linked facilities, headroom can narrow quickly.
Covenant risk is often treated as a theoretical concern rather than an active treasury risk. Monitoring may be infrequent, and downside scenarios insufficiently explored. The interaction between treasury decisions, operating performance, and lender requirements is not always clearly articulated to governing bodies. Integrating relevant KPIs into systems, strategies and processes could alleviate some of this risk.
Refinancing risk exists even when maturities appear distant. Treating it as a future problem is a mistake.
What needs to change in 2026
Universities entering 2026 need to rebalance their treasury risk frameworks. Interest rate risk should no longer be the dominant lens through which treasury is viewed.
Greater emphasis should be placed on liquidity analysis, including regular, credible downside stress testing. Counterparty and concentration risks should be actively managed, with limits grounded in financial strength and the purpose of cash holdings. Funding strategies should explicitly address covenant headroom, refinancing assumptions, and their sensitivity to operational performance.
A 2026 Reset
Treasury risk in universities has evolved, but many policies have not. Institutions that continue to focus primarily on interest rate risk being well managed may well be protected against the wrong threat, while remaining exposed to those most likely to cause disruption.
January 2026 provides a timely opportunity to reset. Universities that adjust their focus now will be better placed to navigate an increasingly constrained and uncertain financial environment. Those that do not may find that their treasury strategies offer reassurance without resilience.
For institutions unsure whether their current treasury risk framework reflects today’s challenges, an independent review by Arlingclose can provide valuable insight and early warning.
05/01/2026
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