UK Banks Pay More for NBFI Liquidity as SoS Spread Flips Positive

Before 2022, the average SoS stood at negative 7 basis points – NBFI funding was cheaper. After the tightening cycle began, it flipped to roughly plus 10 basis points and became more volatile.

The paper identifies two channels driving the shift. Higher short-term rates create an opportunity-cost effect: NBFIs pass along more expensive liquidity to banks. Separately, monetary tightening compresses NBFI balance-sheet capacity unevenly, raising the shadow cost of liquidity and amplifying volatility persistence in the SoS.

For banks that rely on this bilateral segment, the structural change means a more expensive and less predictable funding source at a time when regulatory scrutiny of non-bank leverage is increasing.