Bank of England Faces Rising Risk from Higher-Risk Assets

British banks are increasingly using the Bank of England's funding facilities to pledge higher-risk assets as collateral, exposing the central bank to potential losses.

A Reuters review found that banks pledged £1.9 billion of 'Level C' collateral on August 18, the largest amount since March 2020 and roughly three times the amount a week earlier.

This pushed the total value of Level C collateral held by the BoE through its Indexed Long-Term Repo facility to about £17.8 billion, according to Reuters calculations.

The Bank of England's use of riskier assets raises concerns about the quality and liquidity of the collateral sitting on its balance sheet, particularly if private markets become less willing to finance these assets during a period of financial stress.