BoE Accepts £1.9 Billion in Higher-Risk Assets as Banks Swap Risky Loans for Cash

British banks have been increasingly pledging higher-risk assets as collateral at the Bank of England's weekly auction for six-month funds. On August 18, banks pledged £1.9 billion worth of the BoE's highest-risk type of collateral, its data shows, the most since March 2020 and three times as much as in the previous week.

The total value of Level C collateral on the BoE's books from its Indexed Long-Term Repo has risen to about £17.8 billion, up from £8.7 billion a year ago and under £1 billion in mid-2024. The growing use of these assets is an intended consequence of the BoE's 2022 decision to reverse the £895 billion of quantitative easing it undertook from 2009 to 2021.

The European Central Bank has tightened its criteria for acceptable collateral in recent years, worried that a central bank stamp of approval increases demand for riskier securities that could be hard to sell in a crisis. The BoE accepts a range of products that the ECB has disallowed under its tighter rules on acceptable loan security.