The Bank of England examines whether Barclays understated private credit risk

Reuters, citing a Financial Times report, said the Bank of England is examining whether Barclays traders misrepresented illiquid private credit loans in a way that understated their risk, after an insider at the bank raised concerns¹. Bloomberg Law reported that the Prudential Regulation Authority is evaluating whether Barclays misrepresented the loans⁴, and the Guardian reported that the Bank’s regulatory arm is reviewing the lender’s handling of private credit loans³.

The mechanism at issue is how the exposure was booked. Yahoo Finance reported that the question is whether traders classified derivatives linked to illiquid private credit loans in a particular way⁶, and The Banker described the practice as classifying total return swaps linked to private credit loans as trading positions⁸. Private Equity Wire reported that the effect would be to understate the risks and the capital required to support the exposure⁵.

Why it matters to investors

Shareholders responded before the regulator did. The Times reported that Barclays shares fell after reports it may have understated the risks posed by financial derivatives used to fund private credit lending². HedgeCo reported the same account of the examination⁹. This is a supervisory review rather than an enforcement action, and no finding has been published¹.

The wider issue is that private credit’s reported risk depends on judgments rather than on screen prices. The Guardian noted that critics worry lending standards in the industry have slipped³. The Wall Street Journal reported that more than a dozen lawsuits are taking aim at private-credit accounting practices, at the same time as regulators try to open these funds to a wider pool of investors⁷.

What to watch

Three things would turn this from a single-bank story into a sector one. The first is whether the Prudential Regulation Authority extends the review beyond Barclays^3,4. The second is whether the classification question, trading book or banking book, is settled by supervisory guidance rather than case by case^6,8.

The third is the retail channel. The valuation complaints in the American courts and the regulatory push to widen access are moving in opposite directions⁷, and a finding that a major bank understated the capital behind its private credit exposure would land in the middle of that argument⁵. Barclays’ share price reaction is the cheapest live indicator of how seriously the market is taking it².