Barclays faces PRA scrutiny over private-credit swaps and capital treatment

Barclays is facing scrutiny from the Bank of England’s Prudential Regulation Authority (PRA) over allegations that derivatives used to finance private-credit loans were classified in a way that could have reduced the regulatory capital held against them.

The concerns centre on total return swaps, contracts that allow one party to receive the economic performance of an underlying asset without necessarily owning it. Such instruments can provide financing and transfer risk, but their regulatory treatment depends on the characteristics of the exposure and how it is managed.

According to reporting published on 19 October, concerns raised by a Barclays insider prompted the PRA to review whether swaps linked to relatively illiquid private-credit loans had been placed in the bank’s trading book when they should have received different treatment.

The distinction is commercially important. Trading-book positions are subject to a different capital framework from conventional banking-book exposures. If an instrument is not sufficiently liquid or its risks cannot be managed as required, its classification can affect the amount of capital a bank must maintain.

Barclays said the relevant derivatives accounted for approximately £300m of its total private-credit exposure of around £15bn. The smaller figure is significant because the reported regulatory questions concern a specific set of transactions rather than the bank’s entire private-credit portfolio.

The bank has defended its approach, stating that its treatment of total return swaps is consistent with accounting and regulatory capital requirements. It said the relevant conditions had been met, supported by internal governance and external advisers.

The Bank of England declined to comment on the reported review. No regulatory breach, capital shortfall or enforcement penalty has been publicly established.

The disclosure comes amid wider scrutiny of how banks finance private-credit funds and other non-bank lenders. These relationships can involve direct lending, derivatives and secured structures whose economic risks may be more difficult to assess than their contractual form suggests.

For banks providing liquidity to private-credit vehicles, capital treatment directly influences funding costs and the returns available from such transactions. A requirement to hold more capital could make some arrangements less attractive or prompt changes in structure.

The immediate question is whether Barclays’ treatment complied with the applicable rules. The wider issue is how supervisors assess the risks created when bank capital supports increasingly complex private-credit financing.