BoE Probes Barclays Over Private Credit Trading-Book Classification After Insider Complaint

BoE Probes Barclays Over Private Credit Trading-Book Classification After Insider Complaint

The Bank of England's Prudential Regulation Authority is examining whether Barclays traders "misrepresented illiquid private credit loans to understate their risk after concerns were raised by an insider," the Financial Times reported (Ortenca Aliaj and Martin Arnold). The complaint, received earlier this year, "centred on Barclays' allocation of total return swaps referencing illiquid private credit loans to its trading book." Barclays "has built up billions of dollars' worth of exposure to private credit loans using the derivatives," people familiar with the bank's positions said.

The mechanics: total return swaps let a bank finance loans for private credit funds while passing the economic performance to the client in exchange for a fee. Trading-book treatment carries lower capital charges than the banking book, where illiquid loans would ordinarily sit. Barclays traders have argued that because they hedged the exposure through a matching trade with another counterparty — a back-to-back TRS — "it has become a traded position, one of the people said, despite the loan referenced in the swap being illiquid."

The PRA warned banks against exactly this treatment 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 risks," and "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.¹"

"This is one of those things that has prospered a little bit because the control function has broken down," one of the people told the FT. The probe is also awkward for the PRA itself: chief executive Katharine Braddick worked at Barclays immediately before joining the regulator and must recuse herself from matters concerning her former employer until the end of the year.

What it means: Bank financing of private credit has moved from a market-structure story to a supervisory-enforcement front. The alleged mechanism — repackaging illiquid direct loans into "tradeable" derivatives to cut capital charges — is the same arbitrage the PRA flagged in its significant-risk-transfer financing letter, tying this directly to the SRT boom (European Banks Offload €438 Billion in Corporate Loan Risk via SRTs — Regulators Sound Alarms) and to the US supervisory review of bank lending to private credit firms (NY Fed Reviews Bank Loans to Private Credit Firms at JPMorgan, Wells Fargo, Barclays, Morgan Stanley — SEC Issues Rare Fair-Value Statement). It also sits alongside the April 2026 launch of CDS referencing private credit funds by JPMorgan, Barclays, Morgan Stanley and Citi — derivatives both betting on and entangling the banks with the sector. If the PRA finds the trading-book treatment improper, the cost of bank balance-sheet financing for private credit funds rises, tightening the leverage that amplified the sector's growth.