BoE said to be examining Barclays over private credit reporting

19th Oct 2026 11:07

(Sharecast News) - The Bank of England is reportedly examining whether Barclays traders misrepresented illiquid private credit loans to understate their risk after concerns were raised by an insider.

According to the Financial Times, citing people familiar with the matter, the BoE's Prudential Regulation Authority received a complaint earlier this year about how the bank was recording derivatives used to finance private credit loans. It alleged that the way the bank handled the deals was in breach of the PRA's rules.

It was understood the complaint centred on Barclays' allocation of total return swaps referencing illiquid private credit loans to its trading book. Total return swaps are derivatives that can allow the bank to finance loans for private credit funds while passing the economic performance to the client in exchange for a fee. Banks place assets either in their banking book or trading book, a decision that helps determine how much capital they must set aside to cover potential losses.

The banking book holds loans that are harder to sell and require more capital to protect against losses while the trading book is supposed to house assets that can be easily sold. Misallocating illiquid assets to the trading book would potentially reduce capital requirements and boost profitability.

People familiar with Barclays' positions told the FT the bank has built up billions of dollars' worth of exposure to private credit loans using the derivatives. PRA rules restrict banks from assigning derivatives backed by illiquid collateral to their trading book, unless they can supply enough evidence to justify the treatment. The PRA expressly warned banks against seeking to game the capital rules by repackaging illiquid assets as tradeable ones in a letter to finance directors last year.

"We have identified that for certain financing portfolios, banks have adopted an imprudent approach associated with the recognition of collateral for regulatory capital purposes, resulting in a potential undercapitalisation of the risks," the PRA wrote in the letter. "We consider that the repackaging of illiquid assets into a tradeable format, is not, without appropriate supporting evidence, sufficient to justify regulatory capitalisation under trading book rules."

Private capital loans are normally considered illiquid because they cannot be traded and lack daily mark-to-market trading. The valuation of such loans is at the centre of concerns over potential risks in the $2tn private credit industry. Regulators in Europe, the UK and the US have warned that these valuations could leave lenders exposed to losses in a market downturn and that the relationships between banks and private credit funds could be contributing to systemic risks.

The private credit loans underpinning the derivatives would ordinarily sit in the banking book, where higher capital requirements apply. According to FT sources, Barclays traders have argued that because they have hedged their exposure to the private credit loans through a matching trade with another counterparty - known as a back-to-back total return swap - it has become a traded position, despite the loan referenced in the swap being illiquid.

Barclays told the FT it "takes seriously its regulatory obligations in markets where it operates", adding that it did "not comment on its interactions with regulators". The BoE declined to comment.

At 1105 BST, Barclays shares were down 2.8% at 420.70p.

Russ Mould, investment director at AJ Bell, said: "Regulatory issues are always likely to raise hackles and private credit itself is one of the key worry points for the market right now.

"The concerns are quite technical and relate to how its exposure to private credit loans had been recorded for accounting purposes and the impact this had on the amount of capital Barclays has to hold as a buffer against future turbulence.

"The market reaction, while negative, is relatively measured, suggesting markets are in 'wait-and-see' mode right now.

"But on the basis any probe could be extensive, it could remain a cloud hanging over the business for some time to come."