The Bank of England’s decision to stop accepting bonds tied to thermal coal as collateral puts a practical limit on how UK banks can use those assets to secure central bank loans. The change takes effect in October and sends a market signal about how the Bank assesses coal related financial risk, even as commercial lenders’ broader fossil fuel policies remain uneven.
A change to collateral eligibility
The Bank announced the policy in June through a notice on its website. Under the revised terms, commercial banks will no longer be able to pledge bonds linked to thermal coal operations as collateral when borrowing through key Bank of England arrangements. The measure concerns coal used to generate electricity; it does not amount to a general prohibition on banks financing fossil fuel companies.
Collateral is the guarantee a lender provides when it borrows. The Bank of England lends to major banks operating in the UK, including Barclays, Lloyds, NatWest and HSBC, helping them settle transactions and manage their operations. Bonds are among the assets banks can pledge to obtain that funding. Making coal related bonds ineligible therefore changes how those assets can support access to central bank lending.
The Bank said thermal coal companies “can be exposed to potential financial risks connected to the adjustment of the economy towards net zero.” It also said it would discount the value of bonds in other relevant sectors “to protect the Bank against financial risks.” That language frames the policy as a matter of collateral risk management: if economic change could weaken an asset’s value, the Bank can limit the value it assigns to that asset or exclude it from the collateral pool.
That distinction matters. The move affects the terms on which banks can borrow from the Bank of England; it does not, by itself, establish whether an individual commercial bank will fund a coal project. Still, removing collateral value can make coal related assets less useful to banks’ funding operations and may prompt lenders to reassess the exposure.
Why coal is in focus
Thermal coal faces pressure from the global shift toward renewable energy and from calls by consumers and governments to reduce reliance on the most polluting fossil fuels. The source article describes a risk that some fossil fuel assets could lose value over coming decades as energy systems change. For financial institutions, that prospect raises the question of whether the value of long dated exposures will hold up through a transition in demand and policy.
The Bank’s collateral decision places that question inside a core financial mechanism. It signals that coal related bonds may carry risks relevant to the Bank’s own balance sheet and lending arrangements. It also gives commercial banks a concrete policy change to consider when evaluating their holdings, since an asset’s role as collateral can matter independently of its yield or its issuer’s credit standing.
Many financial institutions have already imposed restrictions on thermal coal. The Institute for Energy Economics and Financial Analysis says more than 200 globally significant institutions have formal divestment policies restricting investment in thermal coal mining, coal fired power projects, or both. That group includes asset managers, asset owners, international banks and other financial firms. The Bank of England’s position may add weight to that existing trend, though the effect on individual lenders will depend on their exposure and funding needs.
A sharper stance than some peers
The source describes the Bank of England’s policy as stricter than the European Central Bank’s approach. Yet the decision received limited attention after appearing as a website notice rather than a formal public announcement. The low profile is notable given the policy’s potential relevance to banks’ collateral management and the broader debate over how central banks account for transition risk.
Ellie McLaughlin, a senior policy and advocacy manager at campaign group Positive Money, called it “a strong signal from a central bank, and to the market as well.” She also said the Bank had been less vocal about its climate work in recent years and that, while the decision was significant, “there are definitely a lot of areas where the Bank could be going further.” Her comments capture the tension around the announcement: it changes a financial rule, but it does not settle the larger question of how far banks should restrict funding across fossil fuel industries.
The Bank has previously adjusted elements of its bond schemes and other financial mechanisms in connection with climate risk. It says that in 2021 it began adjusting the Corporate Bond Purchase Scheme to support an orderly economy wide transition to net zero, while maintaining the scheme’s primary monetary policy purpose, protecting public money and relying on established metrics. The thermal coal collateral decision fits within that stated approach of considering transition risks in financial operations.
Commercial bank policies remain mixed
The new rule arrives against a backdrop of limited progress in banks’ wider commitments. A report published in October by the TPI Global Climate Transition Centre at the London School of Economics and Political Science examined climate policies at 36 of the largest banks by market capitalisation and total assets. It found that banks remained at an early stage of transition, with decarbonisation targets covering a limited range of sectors and business activities.
The report also found that some banks had weakened disclosures on net zero commitments, financing conditions for high emission sectors and fossil fuel policies. In some cases, firms had withdrawn or softened commitments, replacing terms such as “commitment” or “target” with less binding language such as “ambition” or “aspiration.” The study’s findings suggest that coal restrictions can advance even while banks’ overall climate policies remain inconsistent.
According to the same report, no major banks had committed to stop funding new oil, gas and coal. That gap puts the Bank of England’s coal collateral rule in perspective: it is a specific intervention focused on thermal coal assets in a central bank lending framework, while the commercial banking sector has not adopted a uniform end to new fossil fuel finance.
What the signal means for markets
The immediate impact is clear in scope: from October, thermal coal linked bonds will no longer qualify as collateral for the relevant Bank of England loans. The longer term market effect is less certain. Banks could reconsider their coal exposure, but the article provides no estimate of the amount of affected collateral or the likely financial cost to lenders.
My read is that the policy’s importance lies both in its direct terms and in the risk judgment behind them. A central bank has identified thermal coal exposure as relevant to the protection of its own financial position, while the broader market continues to debate how quickly fossil fuel assets may lose value during the energy transition. Whether other financial institutions follow will depend on how they weigh that risk against their existing financing and investment policies. For now, the Bank’s rule makes one point tangible: coal bonds have less utility within a key channel of UK bank funding.