Non-bank Financial Intermediation and Financial Stability: What is the Potential in Market-based Governance

Non-bank financial intermediation (NBFI) has grown year on year and in the latest Financial Stability Board monitoring report (2025), growth in NBFI assets was double that of global banks. In this context, there is concern as to whether NBFI may be able to manage financial stability risks.

NBFI Risks and Risk Management

NBFI enjoys a degree of contractual freedom in managing the risks of asset allocation in terms of horizon and liquidity. Collective investment vehicles or tailored mandates for portfolio management can specify a variety of purposes, and end-investors can theoretically agree to lock-in capital, for a period of time, for illiquid investments. Theoretically, there is much potential for ex ante management of investment expectations and managing the behaviour of end-investors in relation to exit or redemption. However, in a competitive market for assets under management, the NBFI industry has continually innovated to improve on offerings catering for investor preferences, the major preference being improved liquidity. This is reflected in major trends over the last decades in relation to daily redemptions offered at open-ended mutual funds and the rise of exchange-traded funds which offer intra-day liquidity. 

Hence, a major challenge for NBFI is where the promises in relation to liquidity (ie redemption frequencies) become mismatched with the liquidity profiles of the underlying assets, such as long-term assets or assets that are infrequently valued or traded, for example, private credit. If redemptions exceed available inflows or the capacity for orderly asset sales, fire sales could occur in order to meet the needs of ‘redemption runs’. This often leads to downward price pressure on assets and can result in market volatility for asset prices and contagion effects for various financial institutions exposed to a stressed asset class. Where NBFI is connected to the banking sector due to borrowing lines or homogenous exposure to the same asset classes or underlying asset classes where securitised assets are concerned, the financial stability effects can be significant (Cetorelli et al, 2023). 

Financial Stability Board’s Responses and Proposals

Through the Financial Stability Board (FSB), global regulators have attempted to forge international convergence in fund liquidity management regulation (FSB, 2023) in order to close the gaps between comprehensive bank stability regulation and the relatively self-regulating aspect of fund stability. Ex-post liquidity management tools have been proposed to compel funds to take on significant responsibility for managing the redemption interface with their investors. However, such proposals are ultimately designed at a meta-regulatory level, as it would not be practicable to prescribe how funds should manage redemptions at a micro level. In this respect, the model for stability management of fund redemption runs is co-regulatory in nature and ultimately implemented by funds as they respond to market pressures. 

In essence, NBFI would be implementing a form of market-based governance in terms of their exact measures at fund level to ensure orderly redemptions and liquidations of assets in capital markets. My recent work (‘Regulating Financial Institutions for Micro-Stability- What Can New Governance Offer?’ (2024) 40 Banking and Finance Law Review 453) discusses these as forms of ‘guided’ market-based governance within a meta-regulatory suite of measures. 

At the fund level, investor redemptions could be managed with a view to mitigating market instability, by introducing frictions to redemption, such as limiting or suspending redemptions, in order to enforce more orderliness in the process of selling assets. Funds can also impose anti-dilution measures or cost ‘penalties’ in order to deter investors who seek first mover advantage by making redemption requests. These measures make redemptions more expensive to carry out and reflect the cost of asset sales under stressed conditions. 

Ex-post liquidity management tools would not be popular with either funds or their investors. Hence, regulators need to steer behaviour towards protecting the commons of financial stability, while working within the micro-level contractual context of investor-intermediary relations. The meta-regulatory framing of these measures accommodates a degree of discretion for individual funds’ implementation, while steering behaviour towards anticipatory liquidity risk management.

Implementation by Funds and Implications

A notable episode of fund implementation of liquidity management of redemptions occurred early in 2026 relating to the Blue Owl Capital Corporation II (Blue Owl) fund, which is an unlisted business development company specialising in private credit allocations. It gives retail investors exposure to private credit and offers quarterly redemptions. Private credit has recently exploded in popularity, from a niche asset class since the 1980s, with funds engaged in direct due diligence and lending. However, the 2025 failures of US companies First Brands and Tricolour, who were extensive private credit borrowers, raised concerns as to whether private credit as an asset class would experience a crash. There seemed to be no immediate fallout in the private credit market, but redemptions started to rise for the Blue Owl. Robert Armstrong, writing in the Financial Times on 23 Feb 2026, argued that this is not unexpected due to the unique nature of the fund being exposed to retail investors, and thus subject to their behavioural tendencies. Retail investors are more inclined to herd for exit when troubled, a behaviour long observed in depositor runs on banks. 

Initially, Blue Owl’s asset manager tried to manage the redemption rush by offering to merge Blue Owl with its listed fund, which was trading at a 20% discount of the fund’s net asset value. Although that could have improved liquidity, the immediate asset loss was not attractive and the merger plan was called off. In February 2026, Blue Owl announced that it would halt quarterly redemptions and would instead engage in liquidating the fund’s assets to other institutional investors and return capital to investors on a quarterly basis, in line with robust valuation practices. The fund’s announcement aimed to shore up investor confidence by announcing potential purchasers in the form of North American pension and insurance investors, and that sales could be realised at 99.7% of the fund’s net asset value. 

The move by Blue Owl would seem to be aligned with the FSB’s recommendations on liquidity management. Blue Owl is attempting to prevent the need for fire sales of assets that are illiquid and whose valuations could suffer in a market concerned about private credit. By halting redemptions and offering a plan for return of capital over time to investors, with promised periodic frequencies, an episode of market volatility or ‘crash’ in private credit assets could be averted. Time, in essence, can be bought for institutional investors to carry out due diligence and valuation of assets in order for asset liquidation to take place over time. Preserving market stability requires trading off investors’ liquidity (ie immediate liquidity).

However, market sentiment has not been receptive to Blue Owl’s liquidity management efforts, as retail investor redemptions have poured in for other private credit funds affecting Blackstone, KKR, Apollo Capital and Ares Management. In other words, it is arguable that the liquidity management episode by Blue Owl has sparked off the beginning of potential market instability as other funds would have to carry out redemption management as well, if not covered by inflows or orderly sales. The question is whether liquidity management should have been carried out at a more pre-emptive stage and if so, would it have been managed at an individual fund level, and staved off overall negative market sentiment? Regulators may take this perspective, but the ever more preventive agenda for prudential forms of regulation can entail more restrictive forms of risk management, just as the trajectory has been for bank regulation after the global financial crisis. In the alternative, it is arguable that retail participation and liquidity management do not mix, as Robert Armstrong has argued in the Financial Times. This would, if strictly enforced, mean that fund stability management would take on a different character from bank stability management, for example, as funds would not become exposed to retail investor runs, on the assumption that institutional investor behaviour would be more rational. However, excluding retail investor inflows is unattractive for the NBFI industry. 

The FSB’s recommendations for liquidity management by non-bank financial intermediaries are a starting template, and where market-based governance shows insufficiencies in quelling an episode of market instability, lessons for regulatory policy development can be learnt. One expects the meta-regulatory nature of the framework to be tweaked in due course, perhaps in relation to liquidity management plans, triggers for liquidity management tools, and even perhaps managing funds’ exposures ex ante.

Iris H-Y Chiu is Professor of Corporate Law and Financial Regulation, University College London Faculty of Laws