Key Takeaways
- • The Bank of England's Prudential Regulation Authority (PRA) is examining allegations that Barclays misclassified derivatives tied to illiquid private credit loans, according to the Financial Times.
- • The allegations center on Barclays' use of total return swaps to finance loans held by private credit funds, with the concern that positions may be booked in the trading book rather than the banking book.
- • Misclassification could understate risk and the capital required against Barclays' exposure, which the report describes as totaling billions of dollars.
- • The allegations are unproven and no regulatory finding has been announced; the PRA had warned banks last year against treating illiquid assets as tradable for capital purposes without sufficient evidence.
Summary
The Bank of England's Prudential Regulation Authority is examining allegations that Barclays misclassified derivatives linked to illiquid private credit loans, potentially understating the risks and capital needed to support its exposure, according to a Financial Times report. The regulator received a complaint earlier this year concerning the bank's use of total return swaps to finance loans held by private credit funds, according to people familiar with the matter. The allegations have not been proven, and no regulatory finding has been announced.
Barclays has reportedly accumulated billions of dollars in exposure through these arrangements. Its traders argue that matching swaps with other counterparties transforms the positions into tradable exposures, supporting their classification in the trading book rather than the banking book. The distinction matters for private markets financing: banking-book assets generally attract higher capital requirements, while trading-book treatment can reduce the capital banks must hold against certain positions. Incorrect classification could therefore lower funding costs while increasing the risk that losses are inadequately covered.
The PRA warned banks last year against treating illiquid assets as tradable for capital purposes without sufficient supporting evidence. The scrutiny comes amid broader regulatory concern about links between banks and the $2tn private credit market, as lenders increasingly finance private credit funds. Regulators have warned that opaque loan valuations and interconnected exposures could amplify risks during a market downturn.
Barclays has reportedly accumulated billions of dollars in exposure through these arrangements. Its traders argue that matching swaps with other counterparties transforms the positions into tradable exposures, supporting their classification in the trading book rather than the banking book. The distinction matters for private markets financing: banking-book assets generally attract higher capital requirements, while trading-book treatment can reduce the capital banks must hold against certain positions. Incorrect classification could therefore lower funding costs while increasing the risk that losses are inadequately covered.
The PRA warned banks last year against treating illiquid assets as tradable for capital purposes without sufficient supporting evidence. The scrutiny comes amid broader regulatory concern about links between banks and the $2tn private credit market, as lenders increasingly finance private credit funds. Regulators have warned that opaque loan valuations and interconnected exposures could amplify risks during a market downturn.
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