Key Takeaways
- • The Prudential Regulation Authority (PRA) has reportedly received a complaint alleging Barclays breached City rules by placing private credit loans tied to complex derivatives in its trading book, despite PRA restrictions on the practice, according to the Financial Times as cited by The Telegraph.
- • Barclays says the treatment was consistent with accounting and regulatory capital requirements, that its conditions for trading-book classification were met, and that the vast majority of its £15bn private credit exposure sits in the banking book.
- • Shares in Barclays fell more than 3% following the report.
- • The PRA warned banks last year about imprudent collateral recognition for regulatory capital purposes, and in December last year launched the world's first stress test of the private market sector, with results due in 2027.
- • Apollo, Ares, Blackstone, Carlyle and KKR have agreed to participate in the PRA private market stress test.
Summary
The Bank of England's regulatory arm, the Prudential Regulation Authority, reportedly received a complaint this year alleging that Barclays was breaching City rules over its exposure to loans from shadow banks. The complaint reportedly centres on how Barclays treated a series of complex derivatives linked to private credit loans, which have grown into a $2tn (£1.5tn) industry in recent years.
At the heart of the issue is classification. Banks must hold capital against loans in their banking book, which covers less liquid assets and requires larger capital buffers, while assets that are easier to sell can sit in the trading book. The Financial Times reported that Barclays placed the underlying private credit loans tied to the derivatives in its trading book despite PRA rules restricting that practice. Traders reportedly argued that the classification was justified because they had matched their exposure with another counterparty.
Barclays rejected the criticism. A spokesman said: "Under capital rules, we are required to meet certain conditions to classify treatment as trading book. Those conditions were met and supported by appropriate governance internally and by external advisers." The bank said the vast majority of its £15bn private credit exposure is held in its banking book. Shares in Barclays fell more than 3% following the report.
The story fits into broader PRA scrutiny of private credit. Last year the regulator warned banks that, in certain financing portfolios, they had adopted an imprudent approach to recognising collateral for regulatory capital purposes, creating potential undercapitalisation of risks. In December last year the PRA launched the world's first stress test of the private market sector, with Apollo, Ares, Blackstone, Carlyle and KKR among the participating firms and results due in 2027. The Bank declined to comment on the Barclays complaint.
At the heart of the issue is classification. Banks must hold capital against loans in their banking book, which covers less liquid assets and requires larger capital buffers, while assets that are easier to sell can sit in the trading book. The Financial Times reported that Barclays placed the underlying private credit loans tied to the derivatives in its trading book despite PRA rules restricting that practice. Traders reportedly argued that the classification was justified because they had matched their exposure with another counterparty.
Barclays rejected the criticism. A spokesman said: "Under capital rules, we are required to meet certain conditions to classify treatment as trading book. Those conditions were met and supported by appropriate governance internally and by external advisers." The bank said the vast majority of its £15bn private credit exposure is held in its banking book. Shares in Barclays fell more than 3% following the report.
The story fits into broader PRA scrutiny of private credit. Last year the regulator warned banks that, in certain financing portfolios, they had adopted an imprudent approach to recognising collateral for regulatory capital purposes, creating potential undercapitalisation of risks. In December last year the PRA launched the world's first stress test of the private market sector, with Apollo, Ares, Blackstone, Carlyle and KKR among the participating firms and results due in 2027. The Bank declined to comment on the Barclays complaint.
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