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

British banks are increasingly using higher-risk assets as collateral at the Bank of England's Indexed Long-Term Repo (ILTR) facility. The BoE accepts a range of products, including loan notes backed by high-interest store cards and vehicle leases, that have been disallowed under tighter rules at the European Central Bank.

In August, banks pledged £1.9 billion worth of what the BoE calls 'Level C' collateral, its highest-risk type, at the ILTR facility. This is more than three times as much as in the previous week and the most since March 2020.

The BoE has about £17.8 billion of Level C collateral on its books, up from £8.7 billion a year ago and under £1 billion in mid-2024. The central bank charges banks a higher interest rate and applies a bigger 'haircut' to riskier assets, lending less than the asset's full value.

William Allen, a visiting fellow at the National Institute of Economic and Social Research and a former head of the BoE's money markets division, said there is a risk that if the BoE buys too much of these assets it could encourage bad lending.