UK Banks Flood BoE with Risky Assets
British banks are increasingly pledging higher-risk assets as collateral to the Bank of England, a Reuters review of BoE filings shows. On August 18, banks pledged £1.9 billion worth of the BoE's highest-risk type of collateral at its weekly auction for six-month funds, the most since March 2020 and three times as much as in the previous week.
The total amount of Level C collateral on the BoE's books has grown to about £17.8 billion from £8.7 billion a year ago and under £1 billion in mid-2024. The BoE accepts a range of products, including debt products that package up and sell the future payments on homeowners' mortgages.
William Allen, a visiting fellow at the National Institute of Economic and Social Research, said there's a risk that if the BoE buys too much of these assets, it could encourage bad lending. However, he added that the BoE probably understands this already.