Barclays’ Private Credit Trades Draw Bank of England Scrutiny

Barclays PLC (NYSE:BCS) is facing regulatory scrutiny over allegations that traders classified certain private credit-linked positions in a way that understated their risk, potentially affecting how much capital the bank must hold against losses.

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, Reuters reported. The Financial Times first reported the story. 

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Barclays said it takes its regulatory obligations seriously across the markets in which it operates, but did not provide further details about its discussions with regulators, Reuters added.

The complaint centers on total return swaps linked to illiquid private credit loans and how Barclays classified the positions in its trading book. The size of the exposures under scrutiny was not disclosed.

The complaint also questioned whether the treatment complied with PRA rules governing when derivatives backed by illiquid assets can be placed in the trading book. Under those rules, banks must have sufficient evidence to justify such classifications.

The classification can determine how much capital a bank must set aside to absorb potential losses. Treating an illiquid position as more readily tradable could result in lower perceived risk and potentially reduce the capital required to support it.

Barclays traders argued that the positions qualified as traded exposures because they were offset by corresponding swaps with other counterparties, despite being linked to private credit loans that are difficult to sell.

The Bank of England’s September Financial Policy Committee discussion said private credit could be exposed if financial conditions worsen. Earlier this year, the report said, some investors rushed to redeem money from certain private-credit funds amid worries about software exposure, though many funds limited withdrawals to 5%.

Regulators Widen Scrutiny of Private Credit Exposure

The scrutiny comes as regulators on both sides of the Atlantic step up oversight of banks’ exposure to private credit. 

Federal Reserve Bank of New York staff have met with Barclays, JPMorgan Chase, Wells Fargo and Morgan Stanley to examine private-credit risks, including collateral quality and risk controls.

The visits are separate from the Fed’s routine on-site examinations and ongoing monitoring of bank risks.

In March, JPMorgan cut the stated value of a broad set of loans inside private-credit portfolios, which triggered the review. The markdowns were concentrated in loans linked to software businesses facing pressure tied to artificial intelligence.

Bank lending to nonbank financial firms has climbed sharply, rising from about $300 billion in 2016 to more than $1.5 trillion, based on FDIC figures. Semafor said those credits now represent roughly 11% of total bank loans outstanding.

U.S. regulators have also raised concerns about how private assets are valued and how their risks are disclosed.

In a statement, SEC Chief Accountant Kurt Hohl and Brian Daly, director of the agency’s Division of Investment Management, urged firms and auditors to take a closer look at how they value private assets and disclose the risks behind those valuations.

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