BoE Accepts Higher-Risk Assets as Banks Swap Credit for Cash

British banks are increasingly pledging higher-risk assets as collateral at the Bank of England (BoE), according to BoE filings. On August 18, £1.9 billion worth of 'Level C' collateral was pledged by banks in a six-month funds auction.

This is the highest amount since March 2020 and three times what was pledged in the previous week. The total value of Level C collateral on the BoE's books has more than doubled to £17.8 billion from £8.7 billion a year ago, with most coming from Indexed Long-Term Repo (ILTR).

The ILTR allows firms to use a broad range of assets as collateral while allowing the BoE to protect itself through robust risk management.

Some analysts worry that the BoE's acceptance of these higher-risk assets could encourage bad lending, given their role in securitizing mortgage-backed debt and other loans, which contributed to the 2008 financial crisis. However, a spokesperson for the BoE said it continually reviews its framework to ensure consistency with risk tolerance objectives.

Assets on the BoE's Level C list include loan notes backed by vehicle leases with large late-stage instalments known as balloon payments and securities issued by Harben Finance, which owns payments on buy-to-let mortgages originated by Bradford & Bingley before its 2008 government rescue.