BoE Probes Barclays' Handling of Private-Credit Risks, FT Reports

3-line summary

• The Bank of England is examining whether Barclays traders mismarked illiquid private-credit loans to reduce regulatory capital requirements, the Financial Times reported, citing people familiar with the matter; the Prudential Regulation Authority received a complaint earlier this year about how Barclays classified derivatives linked to private-credit loans.
• The complaint centers on total-return swaps, in which the bank funds a private-credit fund's loans and passes the economic performance of those loans to a client for a fee; Barclays traders argued the positions were tradable because back-to-back swaps hedged the exposure, even though the underlying loans themselves were illiquid — the trading-book versus banking-book classification determines how much capital a bank must hold against potential losses.
• The PRA had already warned banks against repackaging illiquid assets as tradable products to reduce capital requirements in a roughly $2 trillion private-credit market; Barclays said it takes its regulatory obligations seriously but declined to comment on its interactions with regulators, and the report does not establish that wrongdoing occurred.

This summary is our own processing of the source article; see the source link below for full context.