Barclays faces regulatory scrutiny over allegations that traders classified certain private credit-linked positions in a way that understated risk, potentially affecting required capital. Reuters reported that the Bank of England's Prudential Regulation Authority (PRA) received a complaint earlier this year after an internal whistleblower raised concerns. The whistleblower's concerns involved derivatives used to finance private credit loans, according to Reuters. The Financial Times first reported the scrutiny.
The complaint centers on total return swaps linked to illiquid private credit loans and how Barclays classified the positions in the trading book. The size of the exposures under scrutiny was not disclosed. The complaint also questioned whether the treatment complied with PRA rules governing when derivatives backed by illiquid assets can enter the trading book. PRA rules require banks to have sufficient evidence to justify such classifications.
The classification can determine how much capital a bank must set aside to absorb potential losses. Treating an illiquid position as more readily tradable could lower perceived risk and potentially reduce required capital. Barclays traders argued that corresponding swaps with other counterparties offset the positions and therefore qualified the positions as traded exposures. The underlying private credit loans were difficult to sell. Barclays said the bank takes regulatory obligations seriously across the markets where Barclays operates, Reuters reported. Barclays provided no further details about discussions with regulators, Reuters added.
The Bank of England's September Financial Policy Committee discussion said private credit could be exposed if financial conditions worsen. The discussion said some investors rushed to redeem money from certain private-credit funds earlier this year amid concerns about software exposure. Many funds limited withdrawals to 5%.
Regulators on both sides of the Atlantic are increasing oversight of banks' exposure to private credit. Federal Reserve Bank of New York staff have met with Barclays, JPMorgan Chase, Wells Fargo and Morgan Stanley to examine private-credit risks. The meetings covered collateral quality and risk controls. The visits are separate from the Federal Reserve's routine on-site examinations and ongoing monitoring of bank risks.
JPMorgan cut the stated value of a broad set of loans in private-credit portfolios in March, triggering the review. The markdowns concentrated on loans linked to software businesses facing pressure tied to artificial intelligence. FDIC figures show bank lending to nonbank financial firms rose from about $300 billion in 2016 to more than $1.5 trillion. Semafor said those credits now represent roughly 11% of total bank loans outstanding.
U.S. regulators have also raised concerns about private-asset valuations and risk disclosures. SEC Chief Accountant Kurt Hohl and Brian Daly, director of the SEC's Division of Investment Management, issued a statement urging closer scrutiny. Hohl and Daly urged firms and auditors to examine how firms value private assets and disclose the risks behind those valuations.
Barclays Faces Bank of England Scrutiny Over Private Credit Risk Classification
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Summary
Citing FLASH AI, Barclays faces Bank of England scrutiny over risk classification of private credit positions. The Prudential Regulation Authority is investigating whether traders mislabeled total return swaps to understate risk-on assets. A whistleblower alleges the strategy may cut capital reserves by treating illiquid loans as tradable. Barclays affirmed it respects regulatory obligations but declined further comment. The probe could impact CFT compliance and broader risk management frameworks.
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