BoE Shifts Towards Riskier Assets as Banks Pledge Billions in High-Risk Collateral

The Bank of England's liquidity operations are shifting towards riskier credit assets as British banks pledge more high-risk collateral to access central bank funding. The trend has seen a significant increase in the share of weaker and potentially less liquid credit exposures linked to BoE funding, including consumer and vehicle-related loans.

According to data, banks pledged £1.9 billion of Level C collateral at the Bank of England's weekly ILTR auction on August 18, the highest since March 2020. The BoE now holds £17.8 billion of Level C collateral, triple the mid-2024 level.

BoE spokesperson says the ILTR is designed to let firms use a broad range of collateral while protecting the central bank through robust risk management. However, William Allen, a visiting fellow at the National Institute of Economic and Social Research and former head of the BoE's money markets division, warns that the central bank risks encouraging poor lending if it goes too far.