Banks optimize their liquidity risk by assuming the externalities posed by their choices on the overall risk of the financial system. The banking sector in Kenya has experienced liquidity challenges ranging from funding to market risks. The purpose of this study was to assess the effect of cash reserves on performance of commercial banks in Kenya. The study found that cash reserves had a strong negative correlation with return on equity giving a significant negative relationship with performance of Equity bank. The study recommended that banks should minimize cash reserves and instead invest this money in productive investments, diversify their sources of funding, diversify their investments of these funds.