The short version
- Regulators are investigating whether Barclays incorrectly classified total return swaps, potentially understating risk and overstating profits.
- The bank maintains its accounting methods comply with all regulatory capital requirements and internal governance standards.
- Shares declined as the review coincides with broader concerns about lending standards in the less-regulated private credit market.
The Bank of England’s Prudential Regulation Authority has initiated a formal review into how Barclays manages its exposure to the private credit sector, specifically focusing on the accounting treatment of financial derivatives. The investigation centers on allegations that the lender may have logged certain contracts in portfolios designated as lower risk than they actually were. If these concerns are substantiated, it could indicate that Barclays did not hold sufficient capital reserves to cover potential losses, which would also suggest that reported profitability figures may have been artificially inflated.
The scrutiny began earlier this year after an internal whistleblower raised alarms about the bank’s handling of total return swaps. These derivatives are financial instruments used to track the performance of underlying assets and were employed by Barclays to finance loans issued to private credit firms. According to reports, the misclassification involved placing these swaps in a portfolio that implied less volatility and risk. This discrepancy is significant because regulatory capital requirements are directly tied to the perceived risk level of assets; lower-risk classifications require banks to hold less capital against potential defaults.
Barclays has firmly rejected the premise that its practices were improper. The bank stated that its treatment of total return swaps aligns fully with both accounting standards and regulatory capital rules. It emphasized that decisions regarding asset classification were supported by robust internal governance structures and validated by external advisers. Barclays noted that while it has built up billions of dollars in exposure to private credit loans through these derivatives, the specific instruments under review account for only £300 million of its total £15 billion exposure to the sector.
The market reacted swiftly to news of the regulatory probe. Shares in Barclays dropped by 3.5 percent on Monday, making it one of the worst performers on the FTSE 100 index amid a broader sell-off in the banking sector. The timing of the announcement adds pressure on the bank as it prepares to report its latest financial results later this week. Investors are likely weighing the potential financial implications of any regulatory penalties or required capital adjustments against the bank’s current earnings trajectory.
The review presents a complex situation for Katharine Braddick, the head of the Prudential Regulation Authority. Braddick previously spent six years at Barclays, serving as head of strategic policy and senior adviser to the chief executive before taking her regulatory role this spring. To manage potential conflicts of interest, the Bank of England has recused her from all matters relating to Barclays until the end of 2026. This arrangement underscores the sensitivity of the case and the need for impartial oversight given her deep prior ties to the institution under investigation.
The broader context involves growing anxiety about the stability of the private credit industry, often referred to as shadow banking. These firms use investor capital rather than customer deposits to fund loans, operating with less regulatory oversight than traditional banks. Concerns have mounted that lending standards in this sector have slipped, with critics arguing that private credit players have been too lenient in assessing borrower creditworthiness. Regulators have warned that any significant fallout from this sector could destabilize traditional banks that have become increasingly intertwined with private credit funds.
Traditional lenders like Barclays have expanded their involvement in this booming market by lending directly to private credit firms or partnering with asset managers on deals. This integration means that risks in the shadow banking sector can quickly transmit to the broader financial system. Earlier this year, anxieties about the sector’s health triggered a multibillion-pound surge in withdrawals from some private credit funds, forcing several to cap client redemptions. The instability has been exacerbated by high-profile failures, including fraud allegations involving US automotive companies Tricolor and First Brands, as well as the collapse of mortgage lender Market Financial Solutions.
Barclays has already absorbed significant losses related to these sector-wide troubles. The bank suffered financial hits following the collapse of Tricolor and took a £228 million loss after the failure of Market Financial Solutions. Despite these setbacks, Barclays Chief Executive CS Venkatakrishnan insisted last year that the bank had adequate controls in place to manage its exposure. The current regulatory review tests those assertions, focusing on whether the mechanisms used to mitigate risk were accurately reflected in the bank’s financial reporting and capital adequacy calculations.
As the investigation proceeds, the focus remains on whether the accounting practices violated specific regulatory mandates or merely represented aggressive but permissible interpretations of complex rules. The outcome could set a precedent for how other banks account for similar derivative exposures in private credit deals. With the sector still recovering from recent high-profile defaults and fraud cases, regulators are under pressure to ensure that systemic risks are properly identified and capitalized against, preventing future instability from spreading through traditional banking channels.
Sources behind this briefing
Go to the original reporting
- The Guardian World↗Bank of England said to be reviewing Barclays’ handling of private credit loans
