Key facts
- British banks are increasingly using higher-risk assets as collateral for Bank of England funds.
- The value of 'Level C' collateral held by the BoE has more than doubled in a year to £17.8 billion.
- On August 18, banks pledged £1.9 billion in the highest-risk collateral category, the most since March 2020.
- The Bank of England accepts a broader range of collateral than the European Central Bank.
- Assets include loans backed by store cards, vehicle leases, and securitized mortgage payments.
British banks are increasingly using higher-risk assets, such as loans tied to store cards and vehicle leases, as collateral to access cash from the Bank of England. A review of BoE filings by Reuters revealed that the amount of 'Level C' collateral, the central bank's highest-risk category, has surged to £17.8 billion, more than double from a year ago and significantly up from under £1 billion in mid-2024. The £1.9 billion pledged on August 18 was the highest since March 2020.
The Bank of England's Indexed Long-Term Repo (ILTR) facility allows banks to use a broad range of assets as collateral for short-term funds. This increased use is an intended consequence of the BoE's decision to reverse quantitative easing, which had previously flooded the financial system with cash. The central bank charges higher interest rates and applies larger 'haircuts' to riskier assets to protect itself from potential losses.
While the BoE maintains robust risk management, the acceptance of assets that the European Central Bank has disallowed raises concerns. These include securitized mortgage-backed debt and loans packaged from credit cards and vehicle leases. Some of these assets have faced credit rating downgrades, and a portion of loans from one eligible pool has a high predicted default rate. Experts note that the market for these riskier assets may be less active due to lower appetite in private markets, potentially increasing the central bank's exposure.