Barclays Faces Bank of England Scrutiny Over Private Credit Trades
The Bank of England’s Prudential Regulation Authority received a complaint alleging Barclays classified certain derivatives linked to illiquid private-credit loans in a way that understated their risk. The exposure size was not disclosed, and Barclays declined to provide details about its discussions with regulators.
Barclays PLC (NYSE: BCS) is under regulatory scrutiny over allegations that traders classified some private credit-linked positions in a way that understated their risk, potentially affecting the capital the bank must hold against losses. Reuters reported that the Bank of England’s Prudential Regulation Authority (PRA) received a complaint earlier this year, after an internal whistleblower raised concerns about derivatives used to finance private credit loans. The Financial Times initially reported the story.
Barclays said it takes its regulatory obligations seriously across the markets where it operates, but gave no further details about its discussions with regulators, Reuters added. The complaint concerns total return swaps linked to illiquid private credit loans and the classification of those positions in Barclays’ trading book. The size of the exposures under review has not been disclosed. The complaint also questioned whether the treatment complied with PRA rules governing when derivatives Read Also: Waymo is bringing robotaxis to Canada in 2028, where Toronto’s winter weather will put them to the test.
Under the rules, positions backed by illiquid assets may be included in the trading book only when banks have sufficient evidence to support that classification. The treatment affects how much capital a bank must hold against potential losses. Classifying an illiquid position as more readily tradable may lower its perceived risk and, in turn, the capital needed to support it. Barclays traders said the positions qualified as traded exposures because they were offset by matching swaps with other counterparties, even though they were linked to private credit loans that are difficult to sell.
The Bank of England’s September Financial Policy Committee discussion noted that private credit could be vulnerable if financial conditions deteriorate. The report said that earlier this year, some investors sought to withdraw money from certain private-credit funds over concerns about software exposure, although many funds capped withdrawals at 5%. The scrutiny comes amid stepped-up oversight by regulators on both sides of the Atlantic of banks’ exposure to private credit. Federal Reserve Bank of New York staff have met with Barclays and JPMorgan.
Chase, Wells Fargo and Morgan Stanley are set to review private-credit risks, including the quality of collateral and risk controls. The visits are separate from the Fed’s regular on-site examinations and its continuing oversight of bank risks. The review followed JPMorgan’s March reduction in the stated value of a broad group of loans held in private-credit portfolios. The markdowns were concentrated in loans tied to software businesses under pressure related to artificial intelligence.
FDIC figures show bank lending to nonbank financial firms rose from about $300 billion in 2016 to more than $1.5 trillion. Semafor reported that these credits now account for roughly 11% of total bank loans outstanding. U.S. regulators have also expressed concern about the valuation of private assets and disclosure of related risks.
SEC Chief Accountant Kurt Hohl and Brian Daly, director of the agency’s Division of Investment Management, said in a statement that firms and auditors should more closely examine how they value private assets and disclose the risks underlying those valuations.