INTRODUCTION Contributed by: Johannes de Jong, Osborne Clarke N.V.
EU without the need for banks to ensure pay - ment finality. Consequently, banks that continue to rely heavily on traditional payment methods may find themselves at a competitive disadvan - tage in the long run. Interest Rate Prospects Central banks worldwide are carefully balancing the need to manage inflation with the goal of supporting economic growth. As of late 2024, the outlook for interest rates remains uncertain, despite a recent trend of rate cuts. While many central banks were raising interest rates to com - bat inflation in the preceding years, this trend reversed in 2024, with several central banks opt - ing to lower rates instead. However, the exact trajectory of rates in 2025 will depend on vari - ous economic factors, including inflation, eco - nomic growth, and geopolitical developments. This uncertainty about the future direction of monetary policy means that banks need to be prepared for both scenarios and manage their interest rate risk accordingly. This includes using hedging strategies and carefully managing asset and liability portfolios. Basel III Standards Fully Implemented Capital adequacy remains a critical concern for banks, as they must ensure they meet regulatory requirements and maintain financial stability. The full implementation of Basel III standards, includ - ing the Basel III.1 revisions, in most jurisdictions by early next year will strengthen capital require - ments, meaning that banks must continue to manage their capital levels prudently. Banks are working to comply with the increased capital requirements and leverage ratio standards. With the end of the leverage ratio relief for EU banks following the COVID-19 pandemic, deposit-heavy banks with small lending books may struggle in 2025 to meet the leverage ratio,
as relief is not expected in the EU any time soon. Although the Basel Committee’s recom - mendations are intended to serve as internation- ally agreed-upon minimum standards, individual regulators have the discretion to diverge from and exceed these standards within their respec - tive countries’ regulations. For instance, the Prudential Regulation Authority (PRA) in the UK announced that it is reviewing the leverage ratio requirements thresholds and is offering relief by consent (provided certain conditions are met) for certain banks. By contrast, the Federal Reserve Board in recent regulatory proposals suggests that the leverage ratio may be further tightened to strengthen the banking system in the USA, despite reiterated calls from the US banking sector to exclude excess reserves held in the Federal Reserve system from the leverage ratio. Overall, we do not expect a “race to the bottom”, where regulators weaken their rules to remain competitive. Asset quality is another key area of focus, par - ticularly in the context of uncertainty around interest rates rising or falling and potential eco - nomic downturns. Banks are closely monitoring loan portfolios and implementing strategies to mitigate credit risk under these circumstances. This includes measures such as stress testing, provisioning, and loan restructuring. Adequate liquidity is essential for banks to withstand mar - ket shocks and meet customer demands. Banks are focusing even more on strengthening their liquidity management practices and maintaining sufficient liquidity buffers. This involves careful monitoring of cash flows, managing funding sources, and implementing effective liquidity risk management frameworks. Banks across these jurisdictions thus need to carefully assess the impact of their ratios and adjust their business strategies as needed.
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