Banks turn to riskier assets for BoE liquidity

British banks are making greater use of less liquid and higher-risk assets to secure cash from the Bank of England, highlighting a change in the way lenders are managing sterling liquidity as reserves created during the quantitative easing era decline.

Public Bank data show lenders pledged £1.9bn of Level C collateral in an Indexed Long-Term Repo auction on 18 August. Level C is the least liquid of the three collateral categories accepted through the facility and can include portfolios of consumer, corporate and mortgage loans, asset finance, and lower-quality asset-backed securities.

The volume was the highest recorded in an auction since March 2020 and three times the amount pledged in the preceding week. Calculations based on Bank data put the total Level C collateral associated with outstanding Indexed Long-Term Repo drawings at about £17.8bn, compared with £8.7bn a year earlier.

The increase comes as the Bank shifts towards a demand-driven, repo-led system for supplying reserves to the banking sector. Quantitative tightening and repayments under earlier funding programmes are reducing the stock of reserves commercial lenders accumulated after the financial crisis and during the pandemic.

Rather than replacing those reserves through permanent asset purchases, the Bank increasingly expects lenders to obtain liquidity through secured borrowing facilities. The Indexed Long-Term Repo, or ILTR, provides reserves for six months through weekly auctions and accepts a broader range of collateral than the Bank’s short-term repo facility.

Use of the ILTR was already rising rapidly before the latest auctions. The Bank reported that outstanding drawings increased from £9.5bn to £69.9bn between February 2025 and February 2026. Of that latter total, £14.1bn was secured against Level C assets.

The direction is deliberate. The Bank expects repo facilities to play an increasingly central role as reserves become less abundant, allowing liquidity to respond to demand across the financial system rather than being supplied principally through a permanently enlarged central bank balance sheet.

The growing use of Level C collateral nevertheless puts greater attention on the assets being exchanged for central bank reserves. The category typically contains instruments that are less liquid than government bonds or high-grade securities and can be harder to sell quickly in stressed markets.

The Bank does not accept those assets at face value. Its framework applies collateral haircuts, eligibility requirements, and pricing differences intended to protect its balance sheet against losses if a borrower fails to repay. Borrowing against Level C collateral also carries a higher minimum spread than borrowing against the most liquid Level A assets.

That framework allows a lender holding consumer or corporate loans to convert economically valuable but relatively illiquid assets into reserves without forcing a sale into wholesale markets. As the quantity of readily available reserves declines, that flexibility becomes a more important part of banks’ routine liquidity management.

For the Bank, the operational challenge is to provide a sufficiently broad liquidity backstop while maintaining robust risk controls as the collateral mix changes. It has sought to make ILTR usage a normal funding activity rather than an indicator of distress, reducing the stigma historically associated with some central bank facilities.

Rising ILTR use is therefore not, in itself, evidence of an emergency funding episode. The Bank has actively redesigned the framework to encourage participation and increased the reserves available through auctions as the system transitions away from abundant liquidity.

The composition of collateral will still attract scrutiny. A larger central bank role in transforming relatively illiquid credit assets into immediately usable reserves creates a closer connection between private-sector loan portfolios and the Bank’s own risk-management framework.

That connection may become more prominent if lending conditions weaken. Consumer credit, corporate loans and mortgage-related assets can perform differently through an economic downturn, increasing the importance of valuation, haircuts, eligibility standards, and ongoing collateral monitoring.

The changing framework also alters banks’ incentives around balance-sheet management. Institutions capable of pre-positioning a wide range of assets with the Bank have more options for sourcing liquidity, reducing the need to hold an equivalent amount of immediately marketable securities solely for funding purposes.

Those benefits sit alongside the need to avoid weakening discipline around asset quality. The Bank maintains that its controls are designed to protect its balance sheet while allowing the financial system to access liquidity against a broad range of eligible assets.

As quantitative tightening continues, banks are likely to become more active users of secured central bank funding. The latest figures show the transition is already changing not only how much liquidity lenders obtain from the Bank, but also the types of assets they use to access it.