Bank of England staff paper finds NBFIs dominate overnight bilateral gilt repo funding for large UK banks and pricing turned costlier after 2022

The Bank of England has published a staff working paper examining the overnight bilateral gilt repo market and how global non-bank financial institutions supply liquidity to large UK banks. Using the Bank’s transaction-level data, the paper finds that in this uncleared overnight segment NBFIs provide substantially more liquidity than traditional interbank lenders, with volumes 6 to 12 times larger. It also finds that NBFI funding was cheaper than interbank funding before 2022, with an average Spread-of-Spread of minus 7 basis points, but became more expensive and more volatile thereafter, averaging about 10 basis points. The analysis covers July 2018 to December 2024 and 336,715 transactions. It shows average weekly volumes involving NBFIs of GBP 18.7bn and a growing network of bank-NBFI relationships, with the number of NBFI counterparties used by banks rising from just over 200 in 2018 to more than 400 by 2024, while bank counterparties stayed around 100. The paper uses a Spread-of-Spread measure to compare NBFI-to-bank and bank-to-bank repo pricing after netting out borrower-specific credit risk, and identifies two drivers of the post-2022 shift. Higher short-term rates raised the opportunity cost of supplying liquidity and led investment funds, insurers and pension funds to demand higher repo rates, while monetary tightening also compressed NBFIs’ balance-sheet capacity, increasing the shadow cost of liquidity and making pricing volatility more persistent across sectors.