The aim of this paper is to theoretically and empirically explain the continued risk in the banking business as well as the mechanisms and methods of managing liquidity and liquidity risk of banks. The last global crisis pointed to the need and importance of a clearer definition of the regulatory framework of liquidity risk management in order to timely identify signals of potential liquidity disorders. The regulatory framework represents response to the complexity of the modern financial system which aim is to create and maintain confidence to stability and security of the banking sector in which banks operate. Liquidity management in the circumstances of the new regulatory requirements imposes to the banks commitment to adapt the business strategy of the new market conditions. Due to new implemented regulatory standards that increase the level of liquid assets, banks have to maintain higher liquidity reserves which results in significant cost of liquidity. The new Basel III standards represent upgrade of existing regulatory rules in terms of capital and liquidity. The reason for study of liquid assets and liquidity risk lies in the importance of an adequate management of liquidity assets as well as costs due to the negative impact on business performance, especially in small banks. For this anaysis puproses a review of the regulatory framework and the liquidity ratios of the Croatian banking system with applied new regulatory standards was made. Detailed analysis of the Croatian banking system was done according to the size of banks' assets and market share, structure of liquid assets and opportunity costs were described, movement of the liquidity and stability indicators of the minimum regulatory requirements was shown and comparison of available funds and the interbank interest rates was described. The conclusions of the case study on the example of large and small banks indicated that new regulatory framework will not necessary stabilize the Croatian banking system due to the increased costs of regulation and the primary influence on the destabilization of small banks.