BoE Exposed to Higher-Risk Assets as British Banks Pledge More Collateral

British banks are increasingly using higher-risk assets as collateral at the Bank of England's Indexed Long-Term Repo (ILTR) facility, according to a review of BoE filings. On August 18, £1.9 billion worth of Level C collateral was pledged at the ILTR's weekly auction for six-month funds, its highest amount 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 has more than doubled to £17.8 billion from a year ago, with some assets being securitised mortgage-backed debt that was a major contributor to the 2008 financial crisis.

William Allen, a visiting fellow at the National Institute of Economic and Social Research and former head of the BoE's money markets division, expressed concerns that accepting these higher-risk assets could encourage bad lending. However, the BoE spokesperson stated that they continually review their framework to ensure it remains consistent with their risk tolerance objectives.

The BoE charges banks a higher interest rate and applies a bigger 'haircut' to riskier assets to protect itself from losses. Analysts have noted that the non-BoE market for these assets might not be as active due to lower appetite for credit in private markets.