BoE Accepts Higher-Risk Assets as Banks Rush to Swap Credit

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

The total amount of Level C collateral on the BoE's books has risen to about £17.8 billion from £8.7 billion a year ago and under £1 billion in mid-2024. This includes loan notes backed by high-interest store cards, vehicle leases, and mortgage-backed debt that was once disallowed by the European Central Bank.

The BoE's decision to allow these assets as collateral is part of its Indexed Long-Term Repo (ILTR) facility, which allows firms to use a broad range of assets while protecting itself through robust risk management. The ILTR has grown in popularity since the BoE reversed £895 billion of quantitative easing in 2022.

Some analysts warn that the central bank's acceptance of higher-risk assets could encourage bad lending and lead to financial instability. William Allen, a visiting fellow at the National Institute of Economic and Social Research and former head of the BoE's money markets division, said, 'The BoE has got good reasons for wanting to buy grade C assets but there's a risk that if they do too much then that can encourage bad lending.'