Barclays faces BoE scrutiny over private credit derivatives risk treatment

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Barclays private credit risk review

Highlights

The Bank of England is investigating whether Barclays misclassified illiquid private credit loan exposures via total return swaps in its trading book to lower capital requirements.
The Prudential Regulation Authority received a complaint alleging Barclays breached rules by handling derivatives meant to finance private credit loans, potentially reducing required capital and boosting profitability.
Barclays has accumulated billions of dollars in private credit loan exposure using total return swaps, arguing matched hedges make such positions tradable despite underlying loan illiquidity.

Regulatory review of trading book treatment

As first reported by the Financial Times, the Bank of England is examining whether Barclays traders misrepresented illiquid private credit loans by allocating related total return swaps to the trading book, rather than treating the exposure in a way that would attract higher capital requirements.

The Prudential Regulation Authority, the BoE's supervisory arm, received a complaint earlier this year alleging Barclays' handling of derivatives used to finance private credit loans breached its rules, according to people familiar with the matter. The complaint focuses on total return swaps referencing illiquid private credit loans, instruments that let a bank finance loans for private credit funds while passing the economic performance to a client for a fee.

Banks divide assets between the banking book and the trading book, a distinction that influences how much capital they must hold against potential losses. Loans and other assets that are difficult to sell typically sit in the banking book and carry heavier capital charges, while the trading book is intended for positions that can be more readily traded.

People familiar with Barclays' positions said the bank has built up billions of dollars of exposure to private credit loans through these derivatives. Misallocating illiquid assets to the trading book could reduce capital requirements and lift profitability.

Barclays traders have argued that hedging exposure to private credit loans through a matching trade with another counterparty, known as a back-to-back total return swap, turns the position into a traded one, one person said, even if the underlying loan referenced in the swap remains illiquid.

In our earlier coverage, the Bank of England highlighted the growing cyber and operational resilience risks facing banks as AI increases the scale and complexity of potential attacks. BoE Deputy Governor Sarah Breeden said lenders should plan for “bare metal” recovery options that can restore critical services even if core technology systems are compromised.

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