Even though Germans are still attached to cash, there are various current developments towards digital forms of payment which, in addition to the associated technical challenges, also have a significant impact on bank management. Examples of this include the obligation to make SEPA Instant Payments and the planned introduction of the digital euro. This article looks at the impact of these developments on banks’ asset liability management, refinancing strategy and liquidity risk management.
Instant Payments
Banks within the eurozone are already acutely affected by Regulation (EU) 2024/886 of the European Parliament and of the Council, which obliges them to enable the sending of SEPA Instant Payments from October 9, 2025. Details can be found on the ECB website
(https://www.ecb.europa.eu/paym/retail/instant_payments/html/instant_payments_regulation.de.html).
This has a particular impact on the management of intraday liquidity risks.
The classic intraday liquidity risk is primarily concerned with the sequence and prioritization of payments whose amount is already known, but whose exact payment time is not. With instant payments, a further challenge is that the number and amount of incoming and outgoing payments are not known in advance. Due to the relatively short historical time series available, it is a particular challenge to calibrate models for forecasting instant payments, especially as the time series generally do not contain any phases with pronounced stress. Some institutions are experimenting with AI-based forecasts here.
Initial experience shows that, under business-as-usual conditions, the introduction of SEPA Instant Payments has not led to major fluctuations in intraday liquidity for most institutions. However, this can be different in a stress case. This is particularly true if this occurs at a weekend and short-term sources of liquidity are not always available. Although it is generally possible not to offer instant payments in the short term in the event of a bottleneck, the associated reputational risk should be considered, which can encourage a bank run, especially during a crisis of confidence.
In practice, this means that institutions should establish intraday liquidity monitoring and a clearly defined limit system, including measures for weekend resilience, as well as define and regularly test escalation and decision-making processes for payment transaction restrictions.
As an excessively large intraday liquidity buffer causes opportunity costs, a decision on the specific buffer size must be made depending on the institution’s risk appetite. Such considerations should also be taken into account when designing and prioritizing measures in the liquidity emergency and recovery plan. The “Sound practices for managing intraday liquidity risk” published by the ECB in November 2024 also provide a good indication of supervisory expectations regarding intraday liquidity risk in general and therefore instant payments in particular.
Digital Euro
Although not quite as acute as SEPA Instant Payments, the ECB’s plans to introduce a digital euro are becoming increasingly concrete. An overview of its planned design can be found on the ECB’s website (https://www.ecb.europa.eu/euro/digital_euro/html/index.de.html).
As payments with the digital euro are also instantaneous, the importance of instant payments will continue to increase depending on its market penetration as a means of payment. Additional momentum may also arise if wallet ecosystems and payment front-ends further simplify reallocations for customers and thus increase the speed of potential outflows.
However, the digital euro poses a challenge not only from an intraday liquidity risk perspective, but more fundamentally for the handling of payment transaction accounts in the retail sector.
From a liquidity risk management perspective, the immediate introduction phase will be particularly exciting. Depending on the acceptance rate of customers, outflows may increase significantly in the short term, which should be taken into account early on in the management of LCR, NSFR and internal limits in order to keep these key figures stable and costs as low as possible. Banks with a high dependency on payment transaction accounts for refinancing should already start thinking about alternative refinancing sources.
It also remains to be seen whether the Digital Euro Wallet will also lead to higher interest rates on deposits as a rival product to traditional current accounts. Negative interest rates, at least, will be much harder to pass on to customers and it cannot be ruled out that at least some customers will expect a premium for leaving their money in a bank account. It is also not unlikely that the base rate of many sight deposits will continue to fall, which will not only have an impact on liquidity risk but also on interest rate risk.
In addition to the potential change in the duration profile and the associated readjustment of portfolio hedges, the NII losses may well be material depending on the current interest and refinancing conditions at the time of introduction, according to initial trial calculations. It is therefore worth adjusting the balance sheet structure at an early stage, including suitable derivatives if necessary.
The ECB is attempting to mitigate the risk of deposits being transferred to the Digital Euro Wallet on a large scale during a bank run with a personal holding limit of presumably 3,000 euros per private user. The digital euro in this form is therefore not a competing product to overnight and term deposits and is essentially designed as a means of payment, but not as a store of value.
In this context, the further development of private stablecoins that are not subject to this restriction remains exciting. So far, no cash alternative has emerged that is sufficiently stable and enjoys the necessary trust to be considered as a genuine competitor to sight deposits. However, given the current momentum, it is not unlikely that this will change quickly. By then at the latest, liquidity and interest rate risk management will have no choice but to assume that a large proportion of sight deposits are due on demand.
Conclusion
We are at the beginning of a fundamental change in payment transactions with far-reaching effects on bank management. Liquidity risk management is increasingly taking place in real time and 24/7, while customer deposits are losing their character as a stable source of refinancing and basis for maturity transformation. Current developments, including in the context of the digital euro and stablecoins, have the potential to further accelerate this change. Banks should therefore start early to optimize their management and balance sheet structure in line with the new circumstances.