BoE Examines Barclays' Private-Credit Swaps as the Bank Defends Its Capital Treatment

Barclays spent Monday defending how it books derivatives tied to private-credit loans, after a report that the Bank of England is examining whether its traders understated the risk those loans carry.

Britain's bank supervisor is looking into how Barclays booked derivatives tied to private-credit lending, after a whistleblower inside the bank complained to the Prudential Regulation Authority earlier this year, the Financial Times reported on Monday in a report carried by Reuters. The complaint, as the FT described it, is that traders understated risk by putting total return swaps that reference loans which are hard to sell into the trading book — the ledger reserved for positions a bank can exit quickly — and that the handling of the deals breached PRA rules. The Bank of England declined to comment on the report, and nothing in Monday's reporting amounts to a regulatory finding: as reported, this is an examination, not a conclusion.

The bank's answer came with numbers attached

Barclays answered on the record the same afternoon, and it did not hedge. The bank told Reuters its "treatment of total return swaps is consistent with accounting and regulatory capital requirements", and said the conditions capital rules impose for trading-book classification had been met and were supported by internal governance and external advisers. It also sized the exposure for the first time in this dispute: total private credit exposure of £15 billion ($19.97 billion), the vast majority of it in the banking book, and a mark-to-market value of about £300 million on its loan total return swaps, based on roughly £1.5 billion of underlying notional assets. A spokeswoman added that Barclays takes seriously its regulatory obligations in the markets where it operates and does not comment on its interactions with regulators.

Why the book a swap sits in is the whole argument

A total return swap lets a bank finance a private credit fund's loans while passing the loans' economic performance to a client in exchange for a fee. Which ledger the position lands in decides how much capital stands behind it: the trading book is reserved for assets that can be sold readily and carries lighter capital requirements, while the banking book — home to loans held over years — demands far more capital against the same risk. PRA rules restrict banks from booking derivatives backed by illiquid assets in the trading book, and the loans underneath these swaps are, by the FT's account, hard to sell. Barclays' traders are said to have justified the treatment on the grounds that they have hedged the underlying exposures with another contract, known as a back-to-back total return swap — in their telling, the hedge made the position a tradable, liquid one. Whether a hedge can make an illiquid loan's risk trading-book eligible is precisely the judgement the PRA is now reported to be testing.

Investors priced the uncertainty, not a verdict

Barclays shares were down 2.6% to 421.4 pence at 0750 GMT on Monday, while the FTSE 100 index was 0.9% lower, and the stock went on to close down 3.5% at 417.50p — the FTSE 100's second-biggest fall of the day, behind only Anglo American. That is the market pricing an open regulatory question three days before the bank reports third-quarter results on Thursday, not a known cost. Shore Capital analyst Gary Greenwood captured the gap in a note carried by The Times: given the lack of disclosure around the size of the affected exposure, the potential financial or capital impact cannot yet be determined should Barclays ultimately be required to represent the loans for regulatory capital purposes, and there is also uncertainty over whether Barclays could face a regulatory penalty and, if so, its magnitude.

Scrutiny of Barclays' private markets book predates Monday

This is not the first time the PRA has looked hard at how Barclays handles private assets. The regulator ordered the bank to review its private equity exposure in 2024, requiring an outside expert to analyse practices in its leveraged finance unit under a section 166 review. This year the Bank's Financial Policy Committee has repeatedly warned on the asset class, saying in September that risky credit markets, including parts of private credit, remained vulnerable to a tightening in financing conditions. Barclays' own private-credit year has already carried a loss: it took a £228 million hit in April from the collapse of Market Financial Solutions, a mortgage lender that went bust amid allegations of fraud, and started reducing its asset-based lending to smaller borrowers. What remains unknown after Monday is considerable — whether the PRA's examination becomes a formal investigation, whether any positions must be moved between books, what a reclassification would cost in capital, and whether other banks' swap books draw the same questions. Thursday's results are the first scheduled moment at which Barclays could be made to say more.