Key Takeaways
- • The Bank of England's Prudential Regulation Authority is reportedly examining whether Barclays traders misrepresented illiquid private credit loans by booking related derivatives in the trading book rather than the banking book, according to the Financial Times citing people familiar with the matter.
- • The complaint, lodged with the PRA earlier this year by an insider, centred on Barclays' allocation of total return swaps referencing illiquid private credit loans, which the complainant alleged breached PRA rules.
- • Misallocation to the trading book could reduce capital requirements; People familiar with Barclays' positions say the bank has built up billions of dollars of exposure to private credit loans through these derivatives.
- • Barclays shares were down 2.8% at 420.70p at 1105 BST, a measured reaction according to AJ Bell's Russ Mould, who said any probe could be extensive.
- • The PRA had warned banks last year, in a letter to finance directors, against repackaging illiquid assets into tradeable formats to justify lower regulatory capital.
Summary
The Bank of England is reportedly examining whether Barclays traders misrepresented illiquid private credit loans to understate their risk, after an insider raised concerns with the Prudential Regulation Authority earlier this year, according to the Financial Times, citing people familiar with the matter. The complaint alleged that Barclays' handling of certain deals breached PRA rules, focusing on how the bank allocated total return swaps referencing illiquid private credit loans to its trading book.
Total return swaps allow a bank to finance loans for private credit funds while passing the economic performance to the client in exchange for a fee. Banks assign assets to either the banking book or the trading book, a classification that affects the capital they must hold against potential losses. Loans in the banking book are harder to sell and attract higher capital requirements, while the trading book is intended for easily saleable assets. Misallocating illiquid assets to the trading book could therefore reduce capital requirements and boost profitability.
People familiar with Barclays' positions told the FT that the bank has built up billions of dollars of exposure to private credit loans through these derivatives. PRA rules restrict banks from assigning derivatives backed by illiquid collateral to the trading book unless they can provide sufficient evidence to justify the treatment. According to FT sources, Barclays traders have argued that a matching back-to-back total return swap with another counterparty turns the exposure into a traded position, despite the underlying loans being illiquid. The PRA had previously warned banks in a letter to finance directors that repackaging illiquid assets into a tradeable format is not, without appropriate supporting evidence, sufficient to justify regulatory capitalisation under trading book rules.
Barclays told the FT it "takes seriously its regulatory obligations in markets where it operates" but would not comment on its interactions with regulators. The BoE declined to comment. At 1105 BST, Barclays shares were down 2.8% at 420.70p. AJ Bell investment director Russ Mould described the concerns as technical, relating to how exposure to private credit loans was recorded and the capital Barclays must hold as a buffer, and noted the market reaction was relatively measured. He added that, given the probe could be extensive, it could remain a cloud over the business for some time. Private credit, a roughly $2tn industry, remains a focus of regulators in Europe, the UK and the US, who have warned that valuations could leave lenders exposed in a downturn.
Total return swaps allow a bank to finance loans for private credit funds while passing the economic performance to the client in exchange for a fee. Banks assign assets to either the banking book or the trading book, a classification that affects the capital they must hold against potential losses. Loans in the banking book are harder to sell and attract higher capital requirements, while the trading book is intended for easily saleable assets. Misallocating illiquid assets to the trading book could therefore reduce capital requirements and boost profitability.
People familiar with Barclays' positions told the FT that the bank has built up billions of dollars of exposure to private credit loans through these derivatives. PRA rules restrict banks from assigning derivatives backed by illiquid collateral to the trading book unless they can provide sufficient evidence to justify the treatment. According to FT sources, Barclays traders have argued that a matching back-to-back total return swap with another counterparty turns the exposure into a traded position, despite the underlying loans being illiquid. The PRA had previously warned banks in a letter to finance directors that repackaging illiquid assets into a tradeable format is not, without appropriate supporting evidence, sufficient to justify regulatory capitalisation under trading book rules.
Barclays told the FT it "takes seriously its regulatory obligations in markets where it operates" but would not comment on its interactions with regulators. The BoE declined to comment. At 1105 BST, Barclays shares were down 2.8% at 420.70p. AJ Bell investment director Russ Mould described the concerns as technical, relating to how exposure to private credit loans was recorded and the capital Barclays must hold as a buffer, and noted the market reaction was relatively measured. He added that, given the probe could be extensive, it could remain a cloud over the business for some time. Private credit, a roughly $2tn industry, remains a focus of regulators in Europe, the UK and the US, who have warned that valuations could leave lenders exposed in a downturn.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.