Key Takeaways
- • The Bank of England's Prudential Regulation Authority is reviewing whether Barclays misclassified total return swaps tied to illiquid private credit loans, according to the Financial Times, following an internal complaint filed earlier this year.
- • The core question is whether the swaps were booked in the trading book, which carries lighter capital charges, rather than the banking book, which would require more capital.
- • Barclays shares fell as much as 3.5% on Monday, one of the weakest FTSE 100 performers, before easing to roughly 2.3% in early New York trading.
- • Barclays has built up billions of dollars of private credit exposure through such structures, per the FT, and has not disclosed any outcome of the review.
- • Thursday's third-quarter results are the immediate focus for investors seeking detail on the size and structure of the private credit book.
Summary
The Bank of England's Prudential Regulation Authority (PRA) is examining whether Barclays PLC (BARC.L) booked derivatives used to finance private credit lending in a way that understated the risk attached to them, according to the Financial Times. The review follows an internal complaint filed earlier this year and centers on total return swaps, instruments that allow a bank to fund a private credit fund's lending while passing the loan's economic performance to a client for a fee.
The key issue is classification. Positions recorded in the trading book attract lighter capital requirements than assets held in the banking book. The complaint alleges that the swaps were placed in the trading portfolio even though the underlying loans are hard to sell. Traders reportedly argued that back-to-back hedges made the exposure tradable. If the loans were in fact illiquid, the classification would have made the positions appear safer than they were, leaving Barclays with less capital against potential losses. The FT reported that Barclays has built up billions of dollars of exposure to private credit through such structures.
Barclays said it "takes seriously its regulatory obligations in markets where it operates" and does not discuss its dealings with supervisors. The Bank of England declined to comment. Barclays shares fell as much as 3.5% on Monday, making the lender one of the weakest performers in the FTSE 100, before paring the decline to roughly 2.3% in early New York trading. The move came days before the bank's scheduled third-quarter results on Thursday.
The review comes as supervisors on both sides of the Atlantic tighten scrutiny of private credit, a market estimated at about $2 trillion. Traditional banks have expanded lending to private credit funds and to companies that also borrow from them, and critics warn that credit standards have loosened during the boom. Barclays Chief Executive CS Venkatakrishnan said last year that the bank had adequate controls in place to manage its private credit exposure.
The PRA has previously cautioned banks against presenting hard-to-trade assets as tradeable instruments to reduce capital requirements. A formal finding against Barclays could force the lender to reclassify positions, hold more capital, or adjust reported figures, though no outcome has been disclosed. For investors, the near-term focus is disclosure: Thursday's results will be scrutinized for detail on the size and structure of the private credit book, and any indication that the review is broadening could weigh on the shares.
The key issue is classification. Positions recorded in the trading book attract lighter capital requirements than assets held in the banking book. The complaint alleges that the swaps were placed in the trading portfolio even though the underlying loans are hard to sell. Traders reportedly argued that back-to-back hedges made the exposure tradable. If the loans were in fact illiquid, the classification would have made the positions appear safer than they were, leaving Barclays with less capital against potential losses. The FT reported that Barclays has built up billions of dollars of exposure to private credit through such structures.
Barclays said it "takes seriously its regulatory obligations in markets where it operates" and does not discuss its dealings with supervisors. The Bank of England declined to comment. Barclays shares fell as much as 3.5% on Monday, making the lender one of the weakest performers in the FTSE 100, before paring the decline to roughly 2.3% in early New York trading. The move came days before the bank's scheduled third-quarter results on Thursday.
The review comes as supervisors on both sides of the Atlantic tighten scrutiny of private credit, a market estimated at about $2 trillion. Traditional banks have expanded lending to private credit funds and to companies that also borrow from them, and critics warn that credit standards have loosened during the boom. Barclays Chief Executive CS Venkatakrishnan said last year that the bank had adequate controls in place to manage its private credit exposure.
The PRA has previously cautioned banks against presenting hard-to-trade assets as tradeable instruments to reduce capital requirements. A formal finding against Barclays could force the lender to reclassify positions, hold more capital, or adjust reported figures, though no outcome has been disclosed. For investors, the near-term focus is disclosure: Thursday's results will be scrutinized for detail on the size and structure of the private credit book, and any indication that the review is broadening could weigh on the shares.
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