Maintaining the fluidity of financial resources in a changing worldwide context

The Bank of England has addressed the changing landscape of funding and liquidity, particularly for Non-Bank Financial Institutions (NBFIs), in a speech given by Executive Director of Financial Stability Strategy, Nathanaël Benjamin. The speech, an abridged version of a lecture delivered at an OMFIF-Bank of England event, highlights the importance of maintaining liquidity resilience and the active participation of banks in private sector funding markets.

According to Benjamin, the 'new normal' for funding and liquidity must take into account the growing importance of market-based finance. Key changes in this environment include a significant increase in cross-border bank credit to NBFIs, rising regulatory pressures, shifts in deposit composition for banks, and evolving market dynamics such as increased securities lending and real-time cash management needs for NBFIs.

One significant development is the growth of bank credit to NBFIs. In Q1 2025, global bank credit to NBFIs expanded by $1.5 trillion, with annual growth rates reaching 14% and concentrated in advanced economies and financial centers like the Cayman Islands, Japan, and the UK.

This expansion, however, has introduced fragility due to large inflows of uninsured deposits from NBFIs, prompting a shift in deposit funding composition among banks. As a result, banks have cut back on liquidity provision via contingent credit lines, impacting firms reliant on such credit lines.

To manage these increased liquidity demands and risks, NBFIs are responding by adopting real-time cash management solutions and increasing their use of deposit accounts to capture interest and diversify liquidity sources.

Despite these headwinds, global liquidity conditions remain robust, as evidenced by soaring mergers and acquisitions activity and a sharp rise in securities lending revenues, indicating strong investor confidence and liquidity availability.

The Bank of England aims to ensure that liquidity is cheap enough to allow sufficient market depth in normal times, but without encouraging a build-up of unsustainable leverage in the system. Central bank reserves play a key role in how liquidity flows through the financial system. However, NBFIs are not able to hold central bank reserves, creating a unique challenge in ensuring liquidity flows to them.

The Bank of England seeks to create a funding and liquidity environment that incentivizes banks and NBFIs to participate actively in private sector funding markets. Banks will continue to play a major role in providing liquidity to NBFIs. To this end, banks are encouraged to manage their liquidity needs, taking into account their ability to use the Bank of England's lending facilities for routine liquidity management.

The resilience of core private sector funding markets is crucial, as they underpin a wide set of transactions that support the provision of services to households and businesses. The overarching goal of the Bank of England is to deliver monetary and financial stability, with a focus on the liquidity needs of NBFIs in the new funding and liquidity landscape.

Three objectives have been set within this overarching goal: ensuring continued provision of financial services by NBFIs, avoiding unsustainable risk-taking and leverage, and supporting the financial system's ability to self-manage increased liquidity demands and self-stabilise in severe but plausible stresses.

Interested readers can find the full speech and watch the lecture on the provided links.

The Bank of England emphasizes the need for a 'new normal' in funding and liquidity that considers the growing influence of market-based finance, such as the rise of bank credit to Non-Bank Financial Institutions (NBFIs).
In response to these changes, NBFIs are turning to sustainable solutions for real-time cash management and seeking out more deposit accounts to diversify their liquidity sources.
The speech delivered by Executive Director Nathanaël Benjamin, discussing the changing landscape of funding and liquidity for NBFIs, highlights the importance of maintaining liquidity resilience and the active participation of banks in these markets.
To ensure liquidity is available to NBFIs, the Bank of England encourages banks to manage their liquidity needs, utilizing the Bank's lending facilities for routine liquidity management.
In the realm of personal-finance and wealth-management, increased liquidity demands and risks warrant careful consideration, as the resilience of core private sector funding markets underpins services to households and businesses.
The data-and-cloud-computing sector has a role to play in this landscape, as advanced analytics, Artificial Intelligence (AI), and technology can provide valuable insights to support decision-making in both bank and non-bank financing.
The liquidity needs of NBFIs in this new funding and liquidity landscape are a key policy priority for the Bank of England, with objectives set to ensure continued provision of financial services, avoid unsustainable risk-taking, and support the system's ability to self-manage increased liquidity demands.