British banks "offload risk" for cash: high-risk retail loan collateral surges twofold in a single week

According to Jinse Finance, as reported by Bank of England filings, UK commercial banks are increasingly pledging high-risk assets—such as loans related to high-interest department store credit cards and car leases—as collateral to the Bank of England. Bank of England data shows that, during the six-monthly indexed long-term repo (ILTR) weekly auction on August 18, banks pledged a total of £1.9 billion in the highest risk category of collateral, marking the highest single-week level since March 2020 and tripling compared to the previous week.

Calculations indicate that the total value of so-called "Category C" collateral currently held by the Bank of England via the ILTR tool is around £17.8 billion, a significant increase from £8.7 billion a year ago. As of mid-2024, the amount was still below £1 billion.

Such transactions highlight the extent of the Bank of England’s exposure to high-risk and potentially illiquid assets. Meanwhile, the European Central Bank has tightened its eligible collateral standards in recent years out of concerns that central bank "endorsement" could fuel demand for risky securities, which might prove difficult to offload during a crisis.

The report cited a Bank of England spokesperson stating that the ILTR tool was originally designed to allow institutions to use a wide range of assets as collateral, while the central bank protects itself through what it describes as "robust risk management."

UK commercial banks use their deposits at the central bank to conduct wholesale transactions. The increased use of the ILTR tool to obtain cash is an anticipated outcome of the Bank of England’s 2022 decision to reverse the £895 billion quantitative easing policy implemented between 2009 and 2021—a policy that had flooded the financial system with liquidity at the time.

External media analysis of the central bank’s Category C collateral list shows that many products accepted by the Bank of England are now banned under the European Central Bank’s stricter eligible loan collateral rules, including various debt instruments backed by the future repayments of residential mortgages.

Related UK bank stocks include HSBC Holdings (HSBC.US), Barclays Bank (BCS.US), Lloyds Banking Group (LYG.US), NatWest Group (NWG.US), and Standard Chartered (SCBFY.US).