Key Takeaways
- • Barclays (LON: BARC) shares fell 3.5% to close at 417.5p, down 15.15p from 432.65p on Friday, after the Financial Times reported a complaint to the Prudential Regulation Authority about how the bank records private credit exposure.
- • The complaint, according to the FT citing people familiar with the matter, alleges Barclays booked total return swaps on illiquid private credit loans in its trading book in breach of PRA rules.
- • The alleged treatment matters because trading book assets carry lower capital requirements than banking book loans, which can reduce capital needs and lift profitability.
- • The shares remain about 22% below the 538.3p peak of the week of July 27, though about 17% above the 357.8p close of October 15 last year.
- • Barclays said it takes its regulatory obligations seriously; the Bank of England declined to comment, and the FT's account rests on unnamed sources.
Summary
Barclays shares fell 3.5% on the day after the Financial Times reported that the Prudential Regulation Authority, the Bank of England's banking regulator, had received a complaint about how the UK universal bank records its private credit exposure. The shares closed at 417.5p, trading between 415.75p and 427.4p. They sit roughly 22% below the 538.3p peak reached in the week of July 27, but about 17% above the 357.8p close on October 15 of last year.
According to the FT, which cited people familiar with the matter, the complaint reached the PRA earlier this year. It alleges that Barclays booked total return swaps, derivatives that pass a loan's returns to another party, on illiquid private credit loans in its trading book, in breach of PRA rules. Private credit refers to loans made outside public bond markets.
The classification is material because trading book assets are meant to be easily sold and carry lower capital requirements than the banking book of harder-to-sell loans. Reportedly, traders argue that a back-to-back swap, a matching offsetting trade with another counterparty, makes the position a traded one. PRA rules restrict illiquid collateral in the trading book unless banks supply sufficient evidence. In a letter to finance directors last year, the regulator said that repackaging illiquid assets into a tradeable format was not, without supporting evidence, enough to justify trading book capital treatment.
Barclays said it takes its regulatory obligations seriously in the markets where it operates. The Bank of England declined to comment. Russ Mould, investment director at AJ Bell, said regulatory issues tend to raise hackles and that private credit is already a key market worry point, adding that the negative reaction appeared relatively measured and suggested markets were in 'wait-and-see' mode. The PRA letter is undated in the reporting, and a statement from Barclays or the regulator would be needed to resolve the question.
According to the FT, which cited people familiar with the matter, the complaint reached the PRA earlier this year. It alleges that Barclays booked total return swaps, derivatives that pass a loan's returns to another party, on illiquid private credit loans in its trading book, in breach of PRA rules. Private credit refers to loans made outside public bond markets.
The classification is material because trading book assets are meant to be easily sold and carry lower capital requirements than the banking book of harder-to-sell loans. Reportedly, traders argue that a back-to-back swap, a matching offsetting trade with another counterparty, makes the position a traded one. PRA rules restrict illiquid collateral in the trading book unless banks supply sufficient evidence. In a letter to finance directors last year, the regulator said that repackaging illiquid assets into a tradeable format was not, without supporting evidence, enough to justify trading book capital treatment.
Barclays said it takes its regulatory obligations seriously in the markets where it operates. The Bank of England declined to comment. Russ Mould, investment director at AJ Bell, said regulatory issues tend to raise hackles and that private credit is already a key market worry point, adding that the negative reaction appeared relatively measured and suggested markets were in 'wait-and-see' mode. The PRA letter is undated in the reporting, and a statement from Barclays or the regulator would be needed to resolve the question.
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