UK Banks Turn to Higher-Risk Assets as Central Bank Funding Dries Up

UK commercial banks are turning to the Bank of England in increasing numbers as they scramble for cash, pledging higher-risk assets such as store credit card loans and mortgage-backed securities in exchange for liquidity. The latest data from the Bank of England shows that £1.9 billion (approximately $2.6 billion) worth of C-tier collateral was submitted at the recent six-month funding auction, a threefold increase from the prior week and the largest single-week total since March 2020.

This trend reflects a structural transformation underway in the UK financial system as the central bank unwinds its £895 billion (approximately $1.2 trillion) quantitative easing portfolio accumulated between 2009 and 2021. The increased use of C-tier collateral is an expected consequence of this process, but it raises concerns about the potential for imprudent lending.

William Allen, a former head of money markets at the Bank of England, has warned that if the central bank accepts too much C-tier collateral, it could fuel excessive risk-taking. The Bank of England emphasizes that it charges higher interest rates on high-risk assets and applies larger haircuts to prevent excessive lending.