SoS! The overnight bilateral liquidity provision of non-bank financial

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate. Published on 10 July 2026

Staff Working Paper No. 1,195

Elio Cucullo, Andrew Clare and Angela Gallo

We study the overnight bilateral gilt repo market to assess how global non-bank financial institutions (NBFIs) supply liquidity to large UK banks. Using proprietary transaction-level data from the Bank of England, we show that, in this segment, NBFIs provide substantially more liquidity than traditional interbank lenders, with volumes 6 to 12 times larger. We compute a relative pricing measure, the Spread-of-Spread (SoS), to capture the NBFI premium over the interbank repo lending. We document that before 2022, NBFI funding was cheaper than the interbank market, with the average SoS at -7 basis points, but became more expensive and volatile thereafter, averaging around 10 basis points. We document two mechanisms: an opportunity-cost channel where higher short-term rates lead NBFIs to pass higher liquidity cost onto banks, and a balance-sheet constraint channel, whereby monetary tightening heterogeneously compresses NBFIs balance-sheet capacity, increases the shadow cost of liquidity, and amplifies the persistence of volatility in the SoS.

SoS! The overnight bilateral liquidity provision of non-bank financial institutions to banks

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