Bank of England examines Barclays’ private credit risk classification

The Bank of England is examining whether Barclays traders misrepresented the risk of illiquid private credit loans in a way that could reduce the bank’s regulatory capital requirements, the Financial Times said. The inquiry focuses on how Barclays classified derivatives linked to loans made to private credit funds.

The issue matters because banks’ capital requirements depend in part on whether positions are treated as trading-book assets or banking-book assets. A lower required capital buffer can leave a bank holding less money against potential losses. The complaint to the Bank of England’s Prudential Regulation Authority arrived earlier this year, according to the Financial Times.

What the complaint concerns

The complaint focused on total return swaps. These arrangements can let banks finance loans for private credit funds while transferring the loans’ economic performance to clients in return for a fee, the Financial Times said.

Barclays traders argued that back-to-back swaps used to hedge their exposure made the positions tradable, even though the underlying loans were illiquid. The question for regulators is whether that classification accurately reflected the risks or treated difficult-to-sell loans as more readily tradable instruments.

What Barclays and regulators have said

The Prudential Regulation Authority has previously warned banks against repackaging illiquid assets as tradable instruments to reduce capital requirements. The Financial Times did not say whether the regulator has reached a conclusion about Barclays or what action, if any, it might take.

Barclays said it takes its regulatory obligations seriously and does not comment on interactions with regulators. The inquiry comes as regulators raise concerns about risks in the $2 trillion private credit market. No timetable for the examination has been announced.

This report draws on information from Yahoo Finance.