Key Takeaways
- • The Bank of England is examining whether Barclays traders misrepresented illiquid private credit loans in a way that understated their risk, according to the Financial Times, citing people familiar with the matter.
- • The Prudential Regulation Authority received an insider complaint earlier this year about how Barclays booked total return swaps referencing private credit loans in its trading book rather than its banking book.
- • The classification matters for capital: treating derivatives tied to illiquid loans as tradable positions can reduce the capital a bank must hold against losses.
- • Barclays shares fell 2.6% to 421.4 pence in early London trading, per Reuters, while the FTSE 100 declined 0.9%.
- • For private credit managers, the probe highlights the swap-based bank financing lines that underpin fund-level leverage, and any repricing of that financing could raise leverage costs.
Summary
The Bank of England is examining whether Barclays traders misrepresented illiquid private credit loans in a way that understated their risk, the Financial Times reported on Monday, October 19, citing people familiar with the matter. Reuters and Investing.com also carried the report. The Bank's Prudential Regulation Authority received a complaint from an insider earlier this year concerning how Barclays recorded derivatives used to finance private credit loans.
According to the FT, as relayed by Reuters, the complaint centers on total return swaps referencing illiquid private credit loans that Barclays allocated to its trading book rather than its banking book. Total return swaps allow banks to finance loans for private credit funds while passing the loans' economic performance to clients for a fee. Barclays traders argued the exposure could be treated as a traded position because it was hedged through a matching swap with another counterparty. The FT did not disclose the size of the positions.
The classification matters because it determines capital requirements. The concern is that booking derivatives tied to illiquid loans as easier-to-trade instruments can understate underlying risk and reduce the capital a bank must hold against losses. The complaint also alleges the treatment breached PRA rules restricting banks from placing derivatives backed by illiquid collateral in the trading book without sufficient justification. The Bank of England declined to comment. Barclays said it takes its regulatory obligations seriously but would not discuss its interactions with regulators.
Barclays shares fell 2.6% to 421.4 pence in early London trading, Reuters reported, while the FTSE 100 was down 0.9%. For private credit managers, the implications extend beyond one bank. Bank financing lines, including swap-based structures, underpin many direct-lending and asset-based strategies, and any supervisory move to reprice or reclassify that financing could raise the cost of leverage for funds.
The examination comes amid growing regulatory attention to the roughly $2 trillion private credit market. Investors will watch whether the PRA broadens its review to other lenders' swap books and whether banks tighten terms on financing provided to private credit vehicles.
According to the FT, as relayed by Reuters, the complaint centers on total return swaps referencing illiquid private credit loans that Barclays allocated to its trading book rather than its banking book. Total return swaps allow banks to finance loans for private credit funds while passing the loans' economic performance to clients for a fee. Barclays traders argued the exposure could be treated as a traded position because it was hedged through a matching swap with another counterparty. The FT did not disclose the size of the positions.
The classification matters because it determines capital requirements. The concern is that booking derivatives tied to illiquid loans as easier-to-trade instruments can understate underlying risk and reduce the capital a bank must hold against losses. The complaint also alleges the treatment breached PRA rules restricting banks from placing derivatives backed by illiquid collateral in the trading book without sufficient justification. The Bank of England declined to comment. Barclays said it takes its regulatory obligations seriously but would not discuss its interactions with regulators.
Barclays shares fell 2.6% to 421.4 pence in early London trading, Reuters reported, while the FTSE 100 was down 0.9%. For private credit managers, the implications extend beyond one bank. Bank financing lines, including swap-based structures, underpin many direct-lending and asset-based strategies, and any supervisory move to reprice or reclassify that financing could raise the cost of leverage for funds.
The examination comes amid growing regulatory attention to the roughly $2 trillion private credit market. Investors will watch whether the PRA broadens its review to other lenders' swap books and whether banks tighten terms on financing provided to private credit vehicles.
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