Bank of England Reviews Barclays' Misreporting of Private Credit Exposure
nashnova research
The Bank of England is investigating whether Barclays traders understated the capital required on billions of dollars in private credit loans by booking derivatives in the wrong ledger. This means → if confirmed, Barclays faces capital top-ups and penalties, and the rulebook for the entire $2 trillion private credit industry could be rewritten.
What exactly did Barclays do?
Barclays used total return swaps (TRS) — contracts that transfer all gains and losses on an asset to a counterparty — to finance private credit loans.
The key move: traders booked TRS linked to illiquid private loans in the trading book, not the banking book. This means → lower capital charges and better-looking returns.
In plain terms = the banking book is for assets you can't easily sell — it demands a thicker safety cushion. The trading book is for assets you can offload quickly — thinner cushion. Barclays put hard-to-sell items into the thin-cushion basket.
Does the traders' defence hold up?
Barclays traders argued they had hedged away private-loan exposure through "back-to-back" TRS, turning the position into a tradeable one.
The problem: the swap itself may be tradeable, but the underlying loans it references remain illiquid. The risk hasn't vanished — it has just been repackaged.
This reflects a deeper tension: derivatives can formally "transport" risk, but the liquidity of the underlying asset doesn't improve just because a contract sits on top of it.
Had the PRA already warned against this?
The PRA wrote to bank CFOs last year, explicitly warning against repackaging illiquid assets into tradeable formats to dodge capital rules.
Its exact words: "Repackaging illiquid assets into a tradeable format, without sufficient supporting evidence, is not adequate to justify the application of trading-book rules."
This means → Barclays' practice lands squarely in the regulator's crosshairs. The PRA had already drawn the line; a whistleblower then came forward, making an investigation all but inevitable.
Why is the timing especially awkward?
The probe is sensitive for the PRA itself: CEO Katharine Braddick worked at Barclays before taking her current post this year.
She must recuse herself from matters involving her former employer by year-end to avoid conflicts of interest. This means → the investigation's independence will itself be scrutinised by the market.
Barclays said it "takes its regulatory obligations seriously" but declined to comment on interactions with regulators. The Bank of England also declined to comment.
What does this mean for the wider private credit industry?
Private credit has grown to roughly $2 trillion, and TRS-based financing is one of its fastest-expanding tools — private credit funds use it to lever up against corporate-loan collateral.
Regulators in Europe, the UK, and the US are already watching the linkages between banks and private credit funds, alongside valuation-transparency concerns.
This reflects an industry-level signal: the outcome of this case will set a benchmark for how regulators classify private credit financing instruments across book boundaries. If the rules tighten, capital costs will rise across the entire chain.
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