Liquidity risk is shifting as non-banks take over from the Fed

The financial backstop advisors have relied on for decades is shrinking. As non-bank institutions take on a growing share of U.S. lending and market-making, the Federal Reserve's ability to step in during periods of stress is becoming less predictable, leaving some portfolios exposed.

New York Life Investment Management (NYLIM), a New York-based firm with approximately $838 billion in assets under management as of June 30, 2026, is calling it a structural inflection point. In its 2026 Megatrends report, released October 5, 2026.

The firm argues that the United States has entered a new era of market-led liquidity defined not by the Fed or commercial banks, but by a widening constellation of non-bank financial institutions (NBFIs) that now sit at the center of how capital flows through the financial system.

The shift carries direct implications for how independent financial advisors build portfolios, assess risk, and talk to clients about where liquidity comes from and whether it will be there when markets turn.

"Investors have traditionally thought about liquidity as a characteristic of an asset or investment vehicle," said Julia Hermann, Global Market Strategist at NYLIM. "We believe it increasingly needs to be understood at the portfolio and financial-system level."

A new era, decades in the making

NYLIM's research identifies three distinct phases of U.S. liquidity provision since the 1980s: a bank-led regime that defined the decades before the 2008 financial crisis; a central bank-led era that followed, defined by Federal Reserve balance sheet expansion and quantitative easing; and the current period, which the firm characterizes as nascent and market-led.

Rules introduced under Dodd-Frank in 2010 and the Basel III international framework constrained how much risk banks could carry on their balance sheets. Structured and corporate credit inventories held by dealers - which had peaked near $300 billion before the crisis - collapsed to roughly $50 billion by the end of 2018 as capital and liquidity requirements tightened, according to NYLIM. Private non-bank players stepped into the resulting vacuum.

Today, private, non-official investors hold approximately 60% of outstanding U.S. Treasury debt, up from 37% in 2014, according to NYLIM's analysis of Federal Reserve and Schwab Center for Financial Research data. Principal trading firms now account for roughly 60% of volume on electronic interdealer Treasury platforms; functions that bank-affiliated dealers once held almost exclusively.

What advisors need to understand

For financial advisors, the practical message is that liquidity is no longer something that can be assumed will be available uniformly across a portfolio in times of stress.

Because NBFIs, from private credit funds and hedge funds to insurers and pension funds, operate largely outside the Fed's formal bank-support infrastructure, the implicit backstop that financial markets relied on for decades is less predictable.

"In today's fragmented financial architecture, liquidity in fixed income markets is not merely a risk constraint - it is a strategic asset," said Michael DePalma, Co-Head of Global Fixed Income at MacKay Shields, NYLIM's affiliated fixed income boutique, in the report. "Because daily pricing does not guarantee market-clearing liquidity, we structure our multi-sector portfolios with explicit liquidity tiers that act as operational pressure valves."

That framing matters for client conversations. Advisors who have been helping clients navigate private credit allocations and semi-liquid fund structures should understand that the broader market environment they operate in has changed structurally, not just cyclically.

Three portfolio-level shifts to watch

NYLIM's report flags three specific developments reshaping how investors are adapting.

First, the growth of secondaries, continuation vehicles, and semi-liquid evergreen fund structures in private markets. Assets under management in evergreen funds - open-ended wrappers around illiquid assets - grew from approximately $271 billion in 2022 to roughly $607 billion by 2026, according to NYLIM data sourced from PitchBook and Morningstar. The report is careful to note that these structures create additional ways to transfer exposures or access capital, but they do not change the underlying liquidity of the assets themselves.

Second, digital asset infrastructure. The NYLIM report acknowledges the growing role of tokenization and stablecoin-based settlement in improving the mobility of assets through the financial system. However, the firm draws a sharp distinction between asset mobility and genuine market liquidity: the ability to transact without materially moving prices still depends on willing buyers, sellers, and effective price discovery — none of which tokenization alone delivers.

Third, the rise of the Total Portfolio Approach (TPA) among institutional investors. The TPA abandons the traditional strategic asset allocation model in which portfolios are divided into asset-class sleeves, in favor of managing risk and liquidity across the entire portfolio rather than within individual buckets.

In a 2024 survey by the Thinking Ahead Institute, 20 of 26 major pension funds and sovereign wealth funds surveyed were already at or moving toward maximum use of the approach. CalPERS voted in November 2025 to replace its strategic asset allocation with a total portfolio approach - the first U.S. public pension fund to do so, according to NYLIM.

The Fed backstop question

The report's most consequential point for advisors may be its analysis of what happens when things go wrong. Under the old bank-led regime, eligible depository institutions had standing, rules-based access to the Federal Reserve's discount window and FDIC insurance. That infrastructure worked swiftly in March 2023, when the failures of Silicon Valley Bank and Signature Bank triggered discount window borrowing that spiked past $150 billion within days.

Non-banks have no equivalent. The Fed retains emergency lending authority under Section 13 of the Federal Reserve Act and can intervene when market functioning is impaired, but it has no legal obligation to backstop a hedge fund or private credit vehicle. Two large hedge fund failures in 2021 drew no central bank response, according to the NYLIM report, because neither threatened a market's basic functioning.

For advisors managing client assets that touch private credit, evergreen structures, or other NBFI-dominated segments, the report's conclusion is direct: a more fragmented liquidity architecture is not necessarily less resilient, but it is less uniform. Understanding where liquidity comes from, and how reliable it may be under stress, is increasingly a prerequisite for sound portfolio construction.

The full 2026 Megatrends report, The Next Era in Global Liquidity: An Architecture, is available on the New York Life Investment Management website.