BoE Exposed to Higher-Risk Assets as British Banks Pledge Record Amounts

British banks are increasingly relying on higher-risk assets as collateral when borrowing from the Bank of England, according to a report by Reuters. This trend is evident in the Bank's Indexed Long-Term Repo (ILTR) auctions, which have seen a significant increase in the use of Level C collateral.

The data shows that on August 18, banks pledged $2.56 billion worth of high-risk assets at the BoE's weekly auction for six-month funds, marking the most since March 2020 and triple the amount from the previous week. The Bank of England has around $24 billion of Level C collateral on its books, up from $11.7 billion a year ago.

The ILTR was designed to allow banks to use a range of assets as collateral while protecting the central bank through robust risk management, according to a BoE spokesperson. However, Reuters analysis revealed that the Bank accepts several debt products tied to mortgage payments, which were previously rejected by the European Central Bank due to stricter rules.

William Allen, a visiting fellow at the National Institute of Economic and Social Research, warned that if the BoE continues to buy these assets, it may encourage bad lending practices.