HedgeCo.Net — The Bank of England is examining whether Barclays traders misrepresented illiquid private credit loans in a way that understated their risk, the Financial Times reported on Monday, October 19, citing people familiar with the matter. Reuters and Investing.com both carried the report. The central bank’s Prudential Regulation Authority received a complaint from an insider earlier this year about how Barclays recorded derivatives used to finance private credit loans.
According to the FT, as relayed by Reuters, the complaint centers on total return swaps referencing illiquid private credit loans that Barclays allocated to its trading book rather than its banking book. Total return swaps let banks finance loans for private credit funds while passing the economic performance of those loans to clients for a fee. Barclays traders argued the exposure could be treated as a traded position because it was hedged through a matching swap with another counterparty, the report said. The FT did not disclose the size of the positions.
The classification matters because it drives capital. The concern is that booking derivatives tied to illiquid loans as easier-to-trade instruments can understate the underlying risk and reduce the capital a bank must hold against losses. The complaint also alleged the treatment breached PRA rules that restrict banks from putting derivatives backed by illiquid collateral in the trading book without sufficient evidence to justify it. The Bank of England declined to comment, and Barclays said it takes its regulatory obligations seriously but would not discuss its interactions with regulators.
Barclays shares fell 2.6% to 421.4 pence in early London trading, Reuters reported, while the FTSE 100 was down 0.9%. For private credit managers, the story is less about one bank than about the plumbing behind fund-level leverage. Bank financing lines, including swap-based structures, sit underneath many direct-lending and asset-based strategies, and any supervisory push to reprice or reclassify that financing could raise the cost of leverage for funds.
The examination comes amid growing regulatory attention on the roughly $2 trillion private credit market. Investors will watch whether the PRA broadens its review to other lenders’ swap books, and whether banks respond by tightening terms on financing provided to private credit vehicles.