“Temporarily discontinuing the current treatment would introduce legal uncertainty for market participants and impose an undue financial burden on the EU banking sector,” the European Commission stated in a press report on 31 March 2025. Photo: Shutterstock

“Temporarily discontinuing the current treatment would introduce legal uncertainty for market participants and impose an undue financial burden on the EU banking sector,” the European Commission stated in a press report on 31 March 2025. Photo: Shutterstock

In a bid to preserve EU bank competitiveness, the European Commission has proposed continuing the current liquidity treatment for short-term securities financing transactions, which is set to expire on 28 June 2025, aligning with global standards and avoiding increased funding costs for EU markets.

The European Commission has proposed maintaining current liquidity rules for short-term securities financing transactions (SFTs) within the EU banking framework to safeguard the competitiveness of EU banks. on Monday 31 March 2025, the proposal seeks to ensure that the liquidity requirements for these transactions remain consistent with the existing transitional treatment under the capital requirements regulation (CRR), which is set to expire on 28 June 2025. This move is designed to support the liquidity of the EU financial markets while preventing additional issuance costs for member states.

As part of the proposal, the European Banking Authority (EBA) has been tasked with reporting on the implications of maintaining the current treatment by 31 January 2029, with subsequent reports due every five years. This ongoing reporting requirement will inform the commission of any need for modifications to the prudential treatment of securities financing transactions. It will be complemented by the continuous monitoring of capital market developments by central banks, alongside the ongoing supervision carried out by the ECB’s single supervisory mechanism and national competent authorities. The long-term reporting framework ensures that the commission stays well-informed on the effectiveness of the liquidity rules and can make data-driven decisions moving forward.

Current liquidity rules and Basel III standards

The CRR currently allows certain short-term SFTs to benefit from lower liquidity requirements compared to those set out in the Basel III international standards. These lower requirements are set to expire on 28 June 2025, at which point the Basel standards would impose higher liquidity requirements. The proposed amendments to the net stable funding ratio (NSFR) are designed to maintain the existing treatment, which would allow EU banks to continue engaging in essential short-term transactions without facing higher funding costs. Such transactions are particularly critical for providing liquidity in government bond markets, including those for sovereign debt and the European Union’s NextGenerationEU bonds, the commission clarified.

Impact on financial markets

The commission’s proposal, which will now undergo review by the European Parliament and Council, aligns with its broader financial market goals outlined in the savings and investments union (SIU) communication. The proposed continuation of current liquidity rules aims to ensure that EU banks remain on an equal footing with global competitors, especially banks from major jurisdictions such as the US, UK, Switzerland, Canada and Japan, which have permanently deviated from the Basel III standards regarding SFTs with a maturity of less than six months, the commission emphasised.

One of the main motivations behind the proposal is to prevent a rise in issuance costs for EU member states when issuing bonds. The commission warned that failing to extend the current treatment could discourage EU banks from engaging in SFTs, particularly those collateralised by sovereign debt, thus diminishing market liquidity. This would lead to higher funding costs for EU member states and could undermine the stability of the financial markets.

Urgency

In addition to ensuring that liquidity requirements remain in place, the commission emphasised the importance of avoiding disruptions that could affect market stability. It called for swift action by the co-legislators, given the approaching deadline of 28 June 2025. If the proposal is accepted, it will enter into force after being published in the EU Official Journal.

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