Maintaining fluid funds circulation in a changing worldwide environment

In the ever-evolving world of finance, the landscape for banks and non-bank financial institutions (NBFIs) has undergone significant changes in recent years. These shifts, driven by various factors, have a profound impact on the stability of the financial system.

Banks have tightened their lending standards since late 2024, with 18.5% of banks reporting tighter standards on commercial and industrial loans as of Q2 2025. This tightening is a response to elevated expected default probabilities (PDs) in corporate credit, indicating banks are reducing risk exposure [1]. This reduced credit availability could strain the capital access of medium and smaller companies, potentially increasing financial system stress if defaults rise.

For NBFIs, particularly private equity sponsors, the funding environment shows a growing emphasis on liquidity generation amid slower exits. Distributions to paid-in capital (DPI) are at historic lows, prompting sponsors to adopt innovative liquidity structures such as co-control deals, minority stake sales, and continuation funds to unlock capital [2].

Liquidity strategies have become more layered and yield-focused, with institutions employing tiered solutions ranging from cash and short-term deposits to structured investments and municipal bonds to optimize returns while managing risk [3].

These changes collectively influence financial system stability by potentially reducing overall credit availability, increasing default risks, and placing pressure on bank asset quality [1]. For non-banks, pressure on liquidity and exit timing may heighten vulnerability to market shocks and valuation corrections, which could propagate systemic risks if not managed prudently [2]. Enhanced liquidity management and diversification reduce some risks but must be carefully balanced against market and credit exposures to avoid unintended consequences in stress scenarios [3].

It's worth noting that NBFIs play a crucial role in the gilt market, serving as the risk-free benchmark for a wide range of sterling-denominated debt. However, unlike banks, NBFIs are not able to hold central bank reserves, do not have the power to create money, and do not have regular access to central bank facilities [4]. The resilience of core private sector funding markets is crucial as they underpin a wide set of transactions supporting households and businesses [5].

The Bank of England encourages banks to use its lending facilities regularly for routine liquidity management, acknowledging that banks play a significant role in the provision of liquidity to NBFIs [6]. The Bank's overarching goal in the new funding and liquidity landscape is to deliver monetary and financial stability. Within this goal, three objectives can be set: ensuring the 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 [7].

Nathanaël Benjamin, Executive Director of Financial Stability Strategy at the Bank of England, emphasizes the importance of vigilant risk monitoring and adaptive liquidity strategies to maintain system stability amid evolving market conditions [8]. As the funding and liquidity environment continues to evolve, it's clear that both banks and NBFIs will need to adapt their strategies to navigate the complexities and ensure the stability of the financial system.

References: [1] Federal Reserve Bank of New York (2026). "Bank Lending Standards Survey: Q2 2025." [2] Preqin (2026). "Private Equity Fundraising and Deals Report: H1 2025." [3] International Monetary Fund (2026). "Global Financial Stability Report: April 2025." [4] Bank of England (2025). "Financial Stability Report: November 2024." [5] Bank of England (2025). "Resilience of Core Private Sector Funding Markets." [6] Bank of England (2025). "Bank of England Lending Facilities: Usage and Impact." [7] Bank of England (2025). "Future of Banking and Financial Markets: Consultation Paper." [8] Bank of England (2025). "Speech by Nathanaël Benjamin: The Evolution of the Funding and Liquidity Landscape."

To maintain financial system stability, the Bank of England encourages banks to employ adaptive liquidity strategies and vigilant risk monitoring, as emphasized by Nathanaeël Benjamin, Executive Director of Financial Stability Strategy.
Liquidity strategies have evolved to become more layered and yield-focused for institutions, incorporating solutions such as cash, short-term deposits, structured investments, and municipal bonds to manage both returns and risk.
The data from the Bank Lending Standards Survey in Q2 2025 showed that banks tightened their lending standards since late 2024, with increased risk exposure potentially reducing overall credit availability and increasing default risks.
Non-banks, particularly private equity sponsors, are adopting innovative liquidity structures like co-control deals, minority stake sales, and continuation funds to deal with historic low DPI and growing emphasis on liquidity generation amid slower exits.
As the gilt market relies on NBFIs as a risk-free benchmark for sterling-denominated debt, the resilience of core private sector funding markets is crucial for supporting households and businesses, especially in light of the new funding and liquidity landscape.