The Bank of England’s Prudential Regulation Authority (PRA) is examining allegations that Barclays misclassified derivatives linked to illiquid private credit loans, potentially understating the risks and capital required to support its exposure, according to a report by the Financial Times.
The regulator received a complaint earlier this year concerning the bank’s use of total return swaps to finance loans held by private credit funds, according to people familiar with the matter. The allegations have not been proven, and no regulatory finding has been announced.
Barclays has reportedly accumulated billions of dollars in exposure through these arrangements. Its traders argue that matching swaps with other counterparties transform the positions into tradable exposures, supporting their classification in the trading book rather than the banking book.
The distinction is significant for private markets financing. Banking-book assets generally attract higher capital requirements, while trading-book treatment can reduce the capital banks must hold against certain positions. Incorrect classification could therefore lower funding costs while increasing the risk that losses are inadequately covered.
The PRA warned banks last year against treating illiquid assets as tradable for capital purposes without sufficient supporting evidence.
The scrutiny comes amid broader regulatory concerns about links between banks and the $2tn private credit market, as lenders increasingly provide financing to private credit funds. Regulators have warned that opaque loan valuations and interconnected exposures could amplify risks during a market downturn.
