British Banks Offload Riskier Assets to Bank of England

The Bank of England now holds approximately £17.8 billion in so-called Level C collateral, a significant surge from the less than £1 billion recorded in mid-2024. This shift stems from the central bank’s ongoing reversal of its pandemic-era quantitative easing, which has tightened liquidity across the financial system. By using the Indexed Long-Term Repo facility, banks can secure central bank cash by backing their requests with assets that other institutions, such as the European Central Bank, have deemed too risky for their own balance sheets.

While the Bank of England maintains that its risk management remains robust—utilizing higher interest rates and steep valuation discounts known as "haircuts" to mitigate potential losses—analysts warn of unintended consequences. The current list of eligible Level C assets includes debt tied to subprime credit cards and mortgages originated by defunct lenders like Bradford & Bingley. Some of these securities have faced multiple credit rating downgrades over the past year. William Allen, a former head of the Bank of England’s money markets division, noted that while the central bank has legitimate reasons for its policy, excessive reliance on such collateral could inadvertently encourage banks to lower their lending standards. As private credit markets show cooling appetite for these complex debt packages, the Bank of England has become the primary backstop for assets that might otherwise prove difficult to liquidate in a market downturn.