6 May 2025

Navigating new regulations on liquidity management

How banks can stay ahead in an evolving liquidity landscape

 

In recent years, the liquidity management ecosystem has borne the weight of resurgent inflation, rising interest rates and geopolitical uncertainty. The next – and no less significant – challenge is maintaining compliance and prosperity in the wake of the third Capital Requirements Regulation (CRR III).

This blog post explores how this regulation could impact cash and liquidity management and how the ecosystem should respond to ensure long-term growth.

The need for regulatory reform

The revised Basel III framework aims to enhance the financial stability and resilience of financial institutions by limiting the use of internal models which are seen to underestimate the risk that institutions are exposed to. While not directly related to this change, the collapse of Credit Suisse in March 2023 has made the need for European regulation to better protect against stress scenarios even more pressing.  

The European Union (EU)’s application of Basel III, CRR III, enacts changes to the capital adequacy measures by introducing an ‘output floor’, which limits the areas and the extent to which internal models can be applied. Although complex and encompassing a raft of parameters, the overall thrust of this update is to close the Risk-Weighted Assets (RWA) gap between internal models and those calculated under the standard approach – a prescriptive method for calculating RWAs laid out in the regulation. By introducing a baseline threshold the internal models cannot go below (the output floor), effectively capping the reduction in RWA that can be achieved, regulators aim to create a more harmonised landscape when it comes to capital requirements.

Given the significance and reach of this update, the liquidity management ecosystem must answer three key questions:

1. What is changing and how will the changes impact capital and liquidity costs?
2. How will final elements of the regulation affect European banks’ cash management, payment offerings and other activities?
3. What can banks and corporates do to best navigate these changes?

Banks’ new capital and liquidity costs

The final reforms of Basel III focus largely on standardising the approach to determining RWAs, using parameters that are clearly defined and calibrated in the capital rules.

While systemically safer for the broader economy, for banks the shift is expected to increase capital costs; transform business incentives; and create implementation challenges. Even in the instances where banks choose to maintain internal models for specific business lines, the process of refinement and approval will be lengthy, complex and data intensive.

Adjustments may also incur compliance costs, as banks upgrade their risk management systems, re-train staff and re-structure their asset portfolios to meet the new requirements.

The impact on liquidity management activities

So, what will the real-world impact of this be on liquidity management? Though the full extent is not yet known, the impact is expected to be far-reaching – and will significantly reshape how banks manage short-term funding and balance sheet efficiency. The following case studies summarise the implications of updated risk weightings across three areas – trade finance instruments, nostro accounts and credit lines. They are based on examples analysed in the Euro Banking Association’s (EBA) 2025 report, ‘Navigating new waters: the ripple effects of regulation on liquidity management’, and should be viewed as illustrative rather than definitive:

1. Letters of credit – Under CRR III's standardised approach, trade finance capital costs are likely to decrease, but impacts vary across counterparties, jurisdictions, and instruments. Increased requirements for internal ratings-based approaches could affect specific segments.
2. Payment corridors – Higher risk-weighting for liquidity in non-OECD countries may increase capital cost for nostro balances, prompting banks to increase attention to their own cash management, partner with more highly rated correspondents and improve forecasting discipline by themself and their clients.
3. Credit lines – Capital costs could rise by approximately 8% for undrawn and fully-drawn overdrafts and revolving credit facilities (RCFs). From 2030, charges for undrawn uncommitted credit lines may alter the practice of using such facilities. Collaboration between corporates and bank treasurers for better liquidity forecasting is advisable.

While banks are not advised to saddle their clients with the intricacies of banking regulation, it is vital that the tangible impacts on their business are demystified, and that any changes to product pricing strategy are clearly outlined.

Solving the regulatory puzzle: A strategic response

The rising costs could affect the pricing of banking products, reshape liquidity management strategies and shift the competitive landscape – ultimately influencing how banks handle payments and manage their liquidity.

Those affected are advised to adopt a proactive approach that focuses on client relationships, cost optimisation and efficient compliance. Whether you apply an internal model or the standardised approach, you'll need to evaluate how these changes impact your overall portfolio. That could mean reassessing your portfolio composition, reallocating risk-weighted assets to areas with lower capital consumption or reducing exposure in segments where capital requirements increase disproportionately. These shifts could influence how banks position and offer credit lines to different counterparties. Ultimately, banks may also need to revisit their pricing strategies – to maintain target profitability or returns, or to stay aligned with market trends – and in some cases, might even consider exiting certain product lines.

Similarly, corporates should assess how higher capital costs for banks might affect the expense of their own liquidity management activities. With updated regulations making bank capital more costly, the imperative to optimise cash usage and minimise reliance on external financing becomes even stronger.

A dynamic approach

While the final Basel III regulation is deep and far-reaching, bear in mind that the switch is accompanied by a generous phase-in period. The output floor is slated to go live at 50% in 2025 and to be stepped up to 72.5% by 2030 – allowing ample time to monitor how the markets move and manage the impacts of the increased capital requirements.

In the mid-term, it will be the task of regulators and the industry to smooth over jurisdictional discrepancies in these frameworks, to preserve an even playing field globally for banks’ capital costs. In the longer term, the EU must prepare to comply with the European Commission’s Instant Payments Regulation (IPR) – marking yet another stress-test for the 24/7 liquidity management ecosystem.

To learn more about the shifting liquidity landscape, read the April 2025 report by the Euro Banking Association (EBA), ‘Navigating new waters: The ripple effects of regulation on liquidity management’. EBA members can download the full report from the EBA Member Portal. The key findings are summarised in a fact sheet.