Barclays (LON: BARC) shares fell 3.5% today after the Financial Times reported that the Prudential Regulation Authority had received a complaint about how the bank records private credit exposure. Barclays is a UK universal bank with consumer, corporate and investment banking arms.
The shares closed at 417.5p, down 15.15p from 432.65p on Friday, after trading between 415.75p and 427.4p. That leaves them about 22% below the 538.3p peak of the week of the 27th of July, though about 17% above the 357.8p close of the 15th of October last year.
According to the FT, which cited people familiar with the matter, the complaint reached the PRA, the Bank of England’s regulator for banks, earlier this year. It alleges that Barclays booked total return swaps, derivatives that pass a loan’s returns to another party, on illiquid private credit loans in its trading book, in breach of PRA rules. Private credit means loans made outside public bond markets.
The booking matters because the trading book holds assets meant to be easily sold and carries lower capital requirements, the loss-absorbing buffer a bank must hold, than the banking book of harder-to-sell loans. That treatment can cut capital needs and lift profitability. Traders reportedly argue that a back-to-back swap, a matching offsetting trade with another counterparty, makes the position a traded one.
PRA rules restrict illiquid collateral in the trading book unless banks supply enough evidence. In a letter to finance directors last year, the regulator said repackaging illiquid assets into a tradeable format was not, without supporting evidence, enough to justify trading book capital treatment.
Barclays said it takes seriously its regulatory obligations in markets where it operates. The Bank of England declined to comment.
Russ Mould, investment director at AJ Bell, the UK investment platform, said regulatory issues tend to raise hackles and that private credit is already a key worry point for markets.
The market reaction, while negative, is relatively measured, suggesting markets are in ‘wait-and-see’ mode right now.
Russ Mould, AJ Bell
The PRA’s letter is undated in the reporting, and the FT’s account rests on unnamed sources, so a statement from Barclays or the regulator is what would settle the question.