The Bank of England is examining whether traders at Barclays (LSE:BARC) classified derivatives linked to illiquid private credit loans in a way that reduced the bank’s regulatory capital requirements, according to a Financial Times report published on Monday.
The newspaper, citing people familiar with the matter, said the Bank of England’s Prudential Regulation Authority (PRA) received a complaint earlier this year concerning the treatment of certain private credit-related transactions.
The reported examination focuses on total return swaps and whether the classification of these instruments appropriately reflected the characteristics of the underlying loans.
The Financial Times did not establish that Barclays had breached regulatory requirements, and no regulatory findings were disclosed in the supplied report.
PRA Examines Treatment of Total Return Swaps
According to the Financial Times, the complaint concerned Barclays’ classification of derivatives associated with private credit financing arrangements.
The transactions involved total return swaps, financial instruments that allow banks to provide financing linked to underlying assets while transferring their economic performance to counterparties in exchange for a fee.
Such arrangements can be used to provide financing to private credit funds.
The report said Barclays traders maintained that back-to-back swap arrangements hedging the bank’s exposure meant the positions could be treated as tradable instruments.
However, the underlying private credit loans were illiquid, raising questions about whether the associated derivatives had been classified appropriately for regulatory capital purposes.
The PRA is reportedly examining the matter following the complaint received earlier in 2026.
Asset Classification Affects Bank Capital Requirements
The distinction between trading book and banking book positions is relevant to the amount of regulatory capital banks must maintain against potential losses.
Trading book positions generally include instruments held for trading purposes, while banking book positions typically include longer-term lending exposures and other assets not held for trading.
Different regulatory capital treatments apply depending on the nature and classification of the exposure.
The Financial Times reported that the examination concerns whether the use of derivatives linked to illiquid loans resulted in a capital treatment that did not adequately reflect the underlying risks.
The PRA has previously warned banks about arrangements that repackage illiquid assets into instruments classified as tradable for the purpose of reducing capital requirements.
The reported examination does not, by itself, establish that Barclays applied an incorrect classification or failed to meet its regulatory obligations.
Barclays Declines to Comment on Regulatory Interactions
According to the Financial Times, Barclays said it takes its regulatory responsibilities seriously but does not comment on its interactions with regulators.
The bank did not provide a detailed response to the specific matters described in the report.
The supplied information does not indicate whether the PRA has reached any conclusions, requested changes to Barclays’ capital treatment or initiated formal enforcement proceedings.
It also does not quantify the value of the transactions under examination or any potential effect on the bank’s regulatory capital position.
Private Credit Market Faces Increased Regulatory Attention
The reported examination comes amid wider regulatory scrutiny of the private credit market, which the source estimates at approximately $2 trillion.
Private credit involves lending arrangements outside traditional publicly traded debt markets, often involving loans that are less liquid than listed bonds or other marketable securities.
Banks can participate in the sector through financing arrangements, derivatives and other services provided to private credit investment funds.
Regulators have been examining the risks associated with these relationships, including the treatment of exposures and the adequacy of capital held against potential losses.
The Barclays matter, as reported by the Financial Times, concerns the classification of specific derivative arrangements rather than a disclosed finding about the bank’s wider private credit activities.
Further information would be required to determine whether the PRA’s examination results in any regulatory action or changes to the treatment of the transactions concerned.
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