Barclays shares fall in London as the BoE turns the spotlight on private credit
According to the FT, an investigation is underway into the way in which the bank accounted for certain total return swaps used to finance loans in the private credit sector
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(Il Sole 24 Ore Radiocor) - Barclays came under selling pressure, falling by around 3 per cent on the London Stock Exchange, in a session in which the FTSE 100 was weak. The main factor weighing on the market is the news that the Bank of England (BoE) is investigating whether some of the bank’s traders misrepresented illiquid private credit loans, which may have led to an underestimation of risk.
According to the Financial Times, a “source with knowledge of the matter” has reported that the Prudential Regulation Authority (PRA) – the supervisory arm of the BoE – received a complaint at the start of the year regarding the way in which Barclays accounted for certain total return swaps used to finance loans in the private credit sector. The key issue for the market is capital: classifying derivatives linked to illiquid loans as tradable positions could reduce the regulatory risk attributed to the exposure and, consequently, the capital that must be set aside against potential losses.
The report also alleges that the approach taken may be at odds with PRA rules, although the scale of the transactions under scrutiny has not been specified. The rules in question restrict banks’ ability to include derivatives backed by illiquid assets in their trading book, unless sufficient documentation is provided to justify such classification.
According to the FT, Barclays traders reportedly argued that the exposures could be regarded as trading positions because they were hedged through mirror-image total return swaps with other counterparties. In this regard, the PRA had already warned banks last year about the risk of ‘repackaging’ illiquid assets into seemingly tradable structures in order to secure a more favourable capital treatment. The bank will present its quarterly results on Thursday 22 October.
