Banks Turn to Riskier Loans as Central Bank Funding Dries Up

UK banks are increasingly relying on riskier collateral when borrowing from the Bank of England. According to Reuters, this includes debt tied to high-interest store cards and vehicle leases.

This trend suggests that private lenders may be charging more or asking for safer collateral when funding against consumer loans. As a result, UK banks have to pledge more loans to raise the same amount of central-bank funding.

The Bank of England applies 'haircuts' to collateral, lending less than an asset's face value to protect itself against losses. The riskier the loan pool, the bigger this discount tends to be.