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

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.