The Bank of England’s Prudential Regulation Authority is examining whether Barclays traders misrepresented illiquid private credit loans to understate risk. The regulator received a complaint alleging that the bank breached PRA rules by allocating total return swaps referencing private credit loans to its trading book instead of its banking book. This misallocation could reduce capital requirements and boost profitability, as trading books require less capital than banking books for illiquid assets.
Barclays has built up billions in exposure to private credit via these derivatives. The PRA previously warned banks against repackaging illiquid assets as tradeable to game capital rules. Private credit loans are typically illiquid due to lack of daily mark-to-market trading, raising concerns over valuation risks in the $2 trillion industry.
Barclays traders argue that hedging via back-to-back total return swaps makes the position tradeable. The bank’s shares fell 1.5% in early trading. The complaint arrives amid growing regulatory scrutiny of systemic risks from bank-private credit fund relationships.
Source: Financial Times Companies · Summarized by HeadlinesBriefing