---
title: "The Bank of England stops taking coal-linked bonds as collateral"
description: "From October, commercial banks can no longer pledge bonds linked to thermal coal when they borrow from the Bank of England. The direct market effect is small, but it establishes that a central bank will price climate transition risk into what it accepts as security."
category: "Economy"
category_url: https://boursel.com/category/economy
author: "Sofia Marchetti"
published: 2026-07-19T07:52:00.000Z
updated: 2026-07-19T07:52:00.000Z
canonical: https://boursel.com/article/the-bank-of-england-stops-taking-coal-linked-bonds-as-collateral
tags: ["bank-of-england", "central-banking", "collateral", "climate-risk", "coal"]
---
# The Bank of England stops taking coal-linked bonds as collateral

From October, commercial banks can no longer pledge bonds linked to thermal coal when they borrow from the Bank of England. The direct market effect is small, but it establishes that a central bank will price climate transition risk into what it accepts as security.

The Bank of England will stop accepting bonds linked to thermal coal as
security when commercial banks borrow from it, a change that takes effect in
October and was announced quietly earlier this summer, [the Guardian
reported](https://www.theguardian.com/business/2026/jul/19/bank-of-england-bonds-coal-loans-assets).

The mechanism is unfamiliar to most people outside banking, and it is the whole
story, so it is worth setting out plainly.

## What collateral does

Central banks lend to commercial banks routinely, not only in emergencies. The
Bank of England regularly issues loans to institutions such as Barclays,
Lloyds, NatWest and HSBC so they can settle transactions and keep operations
running smoothly.

Those loans are secured. The borrowing bank pledges assets, usually bonds, which
the central bank keeps if the loan is not repaid. The central bank decides which
assets it will accept and how much it will lend against each one, applying a
discount known as a haircut.

That decision is more powerful than it sounds. An asset a central bank will
accept is an asset a commercial bank can always convert into cash, which makes
it more attractive to hold, which supports its price and lowers the issuer's
borrowing costs. Removing an asset from the eligible list quietly withdraws that
advantage.

## What has changed

Bonds connected to thermal coal, the grade burned in power stations to generate
electricity, become ineligible. The Bank has also said it will discount the
value of bonds in other relevant sectors "to protect the Bank against financial
risks."

The Bank's stated rationale is risk, not climate policy. Its policy statement
says thermal coal companies "can be exposed to potential financial risks
connected to the adjustment of the economy towards net zero," which is the
argument that assets tied to coal may lose value as economies move away from it,
leaving the central bank holding weakened security.

## The direct effect is modest

Britain is not a significant thermal coal producer and closed its last
coal-fired power station in 2024, so few UK issuers are directly affected. More
importantly, corporate bonds are a small part of what banks actually pledge:
central bank collateral is dominated by government securities, so the number of
coal-linked bonds being handed over on any given day was never large.

This is why the change is best read as a signal rather than a funding shock.
Around 150 of the world's largest financial companies already apply some form of
restriction on business with the thermal coal industry, [according to figures
published by the non-profit Reclaim
Finance](https://www.theguardian.com/business/2026/jul/19/bank-of-england-bonds-coal-loans-assets)
last September, so the Bank is joining a direction of travel rather than setting
it.

Campaigners nonetheless treated it as significant. "It's a strong signal from a
central bank, and to the market as well," Ellie McLaughlin, a senior policy and
advocacy manager at Positive Money, told the Guardian. The hope among activists
is that it pushes commercial banks to reconsider holding coal-linked assets at
all.

## The argument this opens

There is a genuine dispute here, and it is not really about coal.

One view is that this is ordinary risk management. Central banks already refuse
plenty of assets and apply differential haircuts based on credit quality and
liquidity. If an asset class faces a foreseeable structural decline, declining
to lend against it is the same prudential judgment applied to a new risk.

The other view is that collateral eligibility is an instrument of industrial
policy wearing technical clothing. Deciding which industries get privileged
access to central bank liquidity shapes their cost of capital, and doing so
through an unelected institution sidesteps the legislature that would normally
make that call. On this reading, the precedent matters more than the coal: once
the framework can encode transition risk, the question becomes which sector is
assessed next, and by whom.

Both positions are coherent, and where a reader lands depends largely on whether
they regard climate transition as a financial risk that central banks are
obliged to manage, or a policy objective they should stay out of.

## What to watch

The practical question for markets is whether other central banks converge on
exclusion or on pricing. Excluding an asset outright is a blunt instrument;
applying a larger haircut achieves a similar effect while keeping the asset
usable, which is closer to how collateral frameworks normally handle risk. The
Bank has done both, banning coal outright while discounting other exposed
sectors.

If that combination becomes the template, the more consequential half is
probably the haircuts, because they can be extended across many sectors by
degree rather than by prohibition, and with far less public argument.

## Sources

- [Bank of England to stop accepting bonds linked to coal for key loans](https://www.theguardian.com/business/2026/jul/19/bank-of-england-bonds-coal-loans-assets)
- [Collateral eligibility in the Sterling Monetary Framework, market notice](https://www.bankofengland.co.uk/markets/market-notices/2026/june/collateral-eligibility-in-the-smf-11-june-2026)