The Bank of England is examining whether Barclays traders misrepresented illiquid private credit loans to lower the bank’s regulatory capital requirements, according to reports citing sources with knowledge of the matter. The inquiry centers on total return swaps used to finance loans for private credit funds while transferring economic performance to clients in exchange for a fee.
Regulatory Scrutiny on Total Return Swaps
The core of the investigation focuses on whether Barclays properly classified total return swaps tied to illiquid private credit. Expansión reported that traders argued back-to-back hedging swaps made the exposures tradable, despite the underlying loans lacking secondary market liquidity or daily market pricing. The Prudential Regulation Authority previously warned lenders against attempting to bypass capital rules by reconfiguring illiquid assets into negotiable formats without sufficient supporting evidence.
MarketScreener noted that shares of the British bank dropped nearly two percent in early trading following the news of the investigation. Barclays accumulated billions of dollars in exposure to private credit loans through these derivatives structures, according to positions reviewed by regulators.
Capital Requirements and Market Risk
The banking book typically contains difficult-to-sell loans requiring higher capital buffers, whereas the trading book holds easily sold assets under lower capital demands. Regulators across the United Kingdom, Europe, and the United States have raised concerns that close links between banks and the two-trillion-dollar private credit sector could expose lenders to systemic losses during a market downturn.
Barclays stated that it takes its regulatory obligations seriously but declined to comment on interactions with regulators, as reported by Investing.com. The Prudential Regulation Authority continues to review the derivative classifications as part of broader supervisory concerns regarding capital adequacy across the industry.