Barclays Under Scrutiny by Bank of England Over Private Credit Exposure
The central bank is reportedly investigating Barclays regarding its classification of total return swaps used to finance private credit loans.
Barclays is reportedly facing an investigation by the Bank of England concerning claims that traders understated the bank's exposure to risky private credit loans. The probe, initiated after an insider complaint earlier this year, focuses on how the bank classified financial contracts known as total return swaps, which can be used to finance private credit.
According to reports, the complaint alleges that Barclays placed these contracts in its trading book rather than its banking book, a classification that could potentially contravene regulatory rules. Assets in the trading book are generally considered more liquid and easier to sell, while those in the banking book are held for longer durations. Misclassifying private credit loans could lead to an understatement of risk and reduced capital requirements, thereby artificially boosting the bank's reported profitability.
The Bank of England's Prudential Regulation Authority (PRA) has restrictions on lenders assigning illiquid loans to the trading book without substantial supporting evidence.
Barclays traders reportedly argued that the exposure should be treated as a tradable position. A spokesperson for the bank stated that Barclays takes its regulatory obligations seriously but declined to comment further on its interactions with the regulator.
Concerns are mounting within regulatory bodies regarding the risks associated with the private credit market, particularly concerning asset valuations, which could result in significant losses for lenders during a market downturn. Last year, the PRA cautioned banks against 'imprudent' manipulation of capital rules that could lead to the 'potential undercapitalisation of risks.' In a letter to finance directors, the PRA emphasized that 'the repackaging of illiquid assets into a tradable format is not, without appropriate supporting evidence, sufficient to justify regulatory capitalisation under trading book rules.'
Shares in Barclays saw a decline of 3.5 percent, or 15.15p, closing at 417.5p, extending previous losses amidst speculation of a potential tax increase on bank profits.