El Banco de Inglaterra vigila a Barclays porque algunos operadores falsearon la exposición al crédito privado

The Bank of England is scrutinizing Barclays after receiving a complaint alleging the British entity understated the risk of derivatives used to fund private credit loans. The Bank of England's prudential regulator, the PRA, received an internal complaint about how Barclays recorded derivatives used for funding private credit loans, according to sources close to the matter.

The PRA complained that Barclays' management of these operations infringed upon PRA regulations. Barclays has contributed to the boom in the private credit sector by providing hundreds of millions of dollars in financing to this sector. The complaint focuses on Barclays' assignment of total return swaps linked to illiquid private credit loans to its trading portfolio, according to the sources.

These swaps are derivatives that allow the bank to fund loans for private credit funds, transferring the economic performance to the client in exchange for a fee. Banks classify their assets in their banking book or trading portfolio; this decision largely determines the amount of capital they must reserve to cover potential losses.

The improper allocation of illiquid assets to the trading portfolio could reduce capital requirements and increase profitability. Barclays has accumulated exposure of billions of dollars to private credit loans by using these derivatives, according to sources familiar with the bank's positions. PRA regulations prohibit banks from assigning trading portfolio derivatives backed by illiquid assets unless they can provide sufficient evidence to justify such treatment.

Last year, in a letter to financial directors, the PRA explicitly warned banks against trying to evade capital standards by reconfiguring illiquid assets as if they were negotiable assets. The PRA noted that restructuring illiquid assets into a negotiable format is insufficient, without sufficient evidence, to justify the capital treatment of the trading portfolio.

Private credit loans are generally considered illiquid, as they cannot be traded on secondary markets and lack daily market pricing. The valuation of these loans is at the center of concerns about potential risks in the private credit market, valued at $2 trillion. European, UK, and US regulators have warned that these valuations could leave lenders exposed to losses in case of a slowdown in the market, and that links between banks and private credit funds could be contributing to systemic risks.

Private credit loans that serve as the basis for these derivatives should generally be in the investment portfolio subject to higher capital requirements. In the opinion of one of the consulted persons, Barclays claims that by covering its exposure to private credit loans through an equivalent transaction with another counterparty, known as a total return swap, such exposure has been classified as a negotiable position, even though the underlying loan to the swap lacks liquidity.

Barclays shares fell 1.5% during the first operations of Monday. The use of total return swaps in private credit financing is a relatively recent phenomenon that has gained momentum as funds have sought ways to increase leverage by using the loans given to private companies as collateral. This is one of those situations that have thrived, in part, because control mechanisms have failed, according to one of the consulted persons.

The complaint against Barclays comes at a delicate time for the PRA, whose CEO, Katharine Braddick, previously worked at the bank before taking her public sector role this year. Braddick must refrain from intervening in any matter related to her former employer until the end of the year to avoid a potential conflict of interest.

In turn, Barclays stated that it takes its regulatory obligations in the markets it operates very seriously, adding that it will not comment on its interactions with regulatory bodies. The Bank of England (BoE) declined to comment.