U.K. banks are increasingly using higher-risk assets as collateral with the Bank of England.
That’s according to a report Wednesday (Sept. 2) from Reuters, citing its own review of filings at the British central bank.
On August 18, banks pledged $2.56 billion worth of the Bank of England’s highest-risk type of collateral — things like store cards and vehicle leases — at the bank’s weekly auction for six-month funds. That’s the most since March 2020 and three times as much as the prior week, Reuters said.
The news outlet said its calculations show the BoE has about $24 billion of what it calls “Level C” collateral on its books from its Indexed Long-Term Repo (ILTR), up from $11.7 billion a year ago and less than $1.3 billion in mid-2024.
According to Reuters, these transactions show the extent to which the Bank of England is exposed to higher-risk and potentially illiquid assets at a time when the European Central Bank has imposed stricter criteria for what it accepts as collateral.
A BoE spokesperson told Reuters the ILTR was designed to allow banks use a range of assets as collateral while letting the central bank protect itself via what it called robust risk management.
Reuters says its analysis of the Bank of England’s Level C collateral list showed that the bank accepts a range of products in categories that the ECB has no longer allowed under its stricter rules, including several debt products tied to the future payments on homeowners’ mortgages.
The securitization of mortgage-backed debt and other loans was a key cause of the 2008 financial crisis, the report added
“The BoE has got good reasons for wanting to buy grade C assets but there’s a risk that if they do too much then that can encourage bad lending,” said William Allen, a visiting fellow at the National Institute of Economic and Social Research and a former head of the Bank of England’s money markets division. “I think they probably understand that already.”
In other lending news, recent PYMNTS Intelligence research finds that fast-growing middle-market firms aren’t always losing opportunities because lenders turned them down. In many cases, it’s because available credit can’t arrive enough to be useful.
That gap is the center of the PYMNTS Intelligence’s “The Emerging Middle Market: When Credit for Fast-Growing Companies Isn’t Really ‘Credit,’” which finds 85% of accelerating larger companies say they have enough or more than enough credit.
“Yet 46% frequently or very frequently miss growth opportunities because they lack the credit to act, nearly three times the share of established larger firms,” PYMNTS wrote.
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