Bank of England “empties” in exchange for cash: high-risk retail loan collateral triples in a single week

The Zhitong Finance App learned that, according to Bank of England filings, commercial banks in the UK are increasingly pledging high-risk assets — such as high-interest department store credit cards and loans related to car rental — to the Bank of England as collateral. According to central bank data, in the six-month weekly auction of funds on August 18, banks pledged £1.9 billion worth of collateral in the highest risk category. This is the highest weekly level since March 2020, and has tripled from the previous week.

According to calculations, the total amount of so-called “C-level” collateral currently held by the Bank of England through its “indexed long-term repurchase” (ILTR) tool is about 17.8 billion pounds, far higher than the 8.7 billion pounds a year ago, and this amount is still less than 1 billion pounds in mid-2024.

Such transactions highlight the Bank of England's exposure to high-risk and potentially illiquid assets. Meanwhile, the ECB has tightened qualifying collateral standards in recent years because it is concerned that the central bank's “endorsement” will boost demand for risky securities, which may be difficult to get rid of during the crisis.

According to the report, a Bank of England spokesperson said that the original design of the ILTR tool was to allow institutions to use a wide range of assets as collateral, while the central bank protects itself through what it calls “prudent risk management.”

Commercial banks in England use their central bank account deposits to conduct wholesale transactions. The increase in the use of ILTR instruments to obtain this cash is an expected result of the Bank of England's decision in 2022 to reverse the £895 billion quantitative easing policy implemented between 2009 and 2021 — when the policy flooded the financial system with a large amount of liquidity.

Foreign media analysis of the central bank's C-grade collateral list shows that many types of products accepted by the Bank of England have been banned under the ECB's stricter qualifying loan collateral rules, including various debt products that sell future home mortgage repayments in packages.

Related Bank of England stocks include HSBC Holdings (HSBC.US), Barclays Bank (BCS.US), Lloyds Bank Group (LYG.US), National Westminster Bank Group (NWG.US), and Standard Chartered Bank (SCBFY.US).