Key Takeaways
- • The Prudential Regulation Authority (PRA) is examining Barclays after a complaint alleging its traders understated risks on opaque private credit loans, according to the Financial Times.
- • The Financial Times reports Barclays booked the underlying private credit loans tied to certain derivatives in its trading book, despite PRA rules restricting that treatment for such assets.
- • Barclays says the treatment complied with accounting and regulatory capital requirements and that the vast majority of its PS15bn private credit exposure sits in its banking book.
- • Barclays shares fell more than 3% following the report.
- • The PRA warned banks last year about similar collateral and trading-book classification practices, citing potential undercapitalization of risks.
Summary
The Bank of England's banking regulator, the Prudential Regulation Authority (PRA), has begun examining Barclays over claims that its traders understated the risks attached to opaque private credit loans, according to the Financial Times. The PRA reportedly received a complaint this year alleging that Barclays was breaching City rules governing loans originating from shadow banks. The complaint centred on how Barclays handled a set of complex derivatives linked to private credit loans. Regulated lenders have become closely tied to private credit, a market that has expanded into a $2tn industry in recent years.
The core of the issue is classification. Banks assign assets to either their trading book or banking book depending on how difficult they are to sell. The banking book holds less liquid assets and requires the bank to hold more capital against potential losses. According to the Financial Times, Barclays placed the underlying private credit loans tied to the derivatives in its trading book, despite PRA rules restricting that practice. Traders reportedly argued the classification was appropriate because they had matched their exposure with another counterparty.
Barclays stated that its treatment of the trades was consistent with accounting and regulatory capital requirements. It said the vast majority of its PS15bn private credit exposure sits in its banking book, and that the conditions required for trading-book treatment were met and supported by internal governance and external advisers. Shares in Barclays fell more than 3% following the report.
The PRA had warned banks last year about this type of practice in connection with a similar trade commonly executed across the industry. The regulator said not all banks were demonstrating a sufficiently thorough assessment of collateral eligibility, and that for certain financing portfolios some banks had taken an imprudent approach to recognising collateral for regulatory capital purposes, potentially leaving risks undercapitalised.
The core of the issue is classification. Banks assign assets to either their trading book or banking book depending on how difficult they are to sell. The banking book holds less liquid assets and requires the bank to hold more capital against potential losses. According to the Financial Times, Barclays placed the underlying private credit loans tied to the derivatives in its trading book, despite PRA rules restricting that practice. Traders reportedly argued the classification was appropriate because they had matched their exposure with another counterparty.
Barclays stated that its treatment of the trades was consistent with accounting and regulatory capital requirements. It said the vast majority of its PS15bn private credit exposure sits in its banking book, and that the conditions required for trading-book treatment were met and supported by internal governance and external advisers. Shares in Barclays fell more than 3% following the report.
The PRA had warned banks last year about this type of practice in connection with a similar trade commonly executed across the industry. The regulator said not all banks were demonstrating a sufficiently thorough assessment of collateral eligibility, and that for certain financing portfolios some banks had taken an imprudent approach to recognising collateral for regulatory capital purposes, potentially leaving risks undercapitalised.
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