Key Takeaways
- • The Bank of England is reportedly investigating Barclays over claims its traders understated exposure to risky private credit loans, according to the Financial Times, which first reported the complaint.
- • The probe centres on total return swaps used to finance private credit loans, which allegedly were placed in Barclays' trading book rather than its banking book, potentially breaching PRA rules.
- • Classifying illiquid loans in the trading book can understate risk and reduce capital requirements, boosting reported profitability.
- • Barclays shares fell 3.5 per cent, or 15.15p, to 417.5p, extending last week's losses amid fears of a bank tax increase in the upcoming Budget.
Summary
The Bank of England is reportedly investigating Barclays over allegations that its traders understated the bank's exposure to risky private credit loans, according to This is Money, citing the Financial Times. The probe follows a complaint from an insider earlier this year and focuses on how Barclays classified total return swaps, contracts that can be used to finance private credit loans.
The FT reported that the complaint alleges Barclays placed these contracts in its trading book rather than its banking book, potentially breaching regulatory rules. Loans held in the trading book can be sold more easily, while banking book assets are typically held for longer periods. The Prudential Regulation Authority restricts lenders from assigning illiquid loans to the trading book unless they can provide sufficient evidence to justify it. Misallocation could understate underlying risk and reduce capital requirements, thereby boosting profitability. Barclays traders reportedly argued the exposure should be treated as a traded position.
A Barclays spokesman said the bank 'takes seriously its regulatory obligations in markets where it operates' but declined to comment further on its interactions with the regulator. The case comes amid growing regulatory concern over private credit valuations, which could leave lenders exposed to losses in a downturn. Last year, the PRA warned banks against 'imprudent' gaming of capital rules, stating that repackaging illiquid assets into a tradable format is not, without appropriate supporting evidence, sufficient to justify regulatory capitalisation under trading book rules.
Barclays shares fell 3.5 per cent, or 15.15p, to 417.5p, extending last week's losses amid fears of a tax raid on bank profits in next week's Budget. Chancellor John Healey is reportedly considering restoring the bank surcharge to 8 per cent from the 3 per cent level introduced by former Chancellor Jeremy Hunt in April 2023.
The FT reported that the complaint alleges Barclays placed these contracts in its trading book rather than its banking book, potentially breaching regulatory rules. Loans held in the trading book can be sold more easily, while banking book assets are typically held for longer periods. The Prudential Regulation Authority restricts lenders from assigning illiquid loans to the trading book unless they can provide sufficient evidence to justify it. Misallocation could understate underlying risk and reduce capital requirements, thereby boosting profitability. Barclays traders reportedly argued the exposure should be treated as a traded position.
A Barclays spokesman said the bank 'takes seriously its regulatory obligations in markets where it operates' but declined to comment further on its interactions with the regulator. The case comes amid growing regulatory concern over private credit valuations, which could leave lenders exposed to losses in a downturn. Last year, the PRA warned banks against 'imprudent' gaming of capital rules, stating that repackaging illiquid assets into a tradable format is not, without appropriate supporting evidence, sufficient to justify regulatory capitalisation under trading book rules.
Barclays shares fell 3.5 per cent, or 15.15p, to 417.5p, extending last week's losses amid fears of a tax raid on bank profits in next week's Budget. Chancellor John Healey is reportedly considering restoring the bank surcharge to 8 per cent from the 3 per cent level introduced by former Chancellor Jeremy Hunt in April 2023.
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