Barclays defends private-credit swaps after reported PRA scrutiny

The Prudential Regulation Authority is examining concerns about Barclays’ trading-book classification of total-return swaps linked to private-credit loans, the Financial Times reported on 19 October. The reported scrutiny follows an insider complaint; it is not a published finding that the bank breached capital rules.[1]

Barclays told Reuters its treatment meets accounting and capital requirements. Most of its private-credit exposure sits in the banking book.[2]

Those figures answer different questions. The notional describes the reference amount behind the swaps; mark-to-market describes their current valuation. Neither should be substituted for the bank’s total exposure, or treated as a calculated capital shortfall. A capital assessment needs the relevant positions, applicable methodology and recognised offsets.[3][4]

The current PRA Trading Book rules make the classification question more precise than whether the underlying loan trades frequently. Article 102 requires positions to be tradable without restrictions or capable of being hedged, with trading intent supported by documented strategies and procedures. Article 103 requires firms to consider reliable valuation, the availability of liquid hedging markets and legal or operational obstacles to liquidation. Article 104 requires documented compliance and periodic internal audit.[3]

The commercial issue is whether a bank’s capital treatment captures the risks of the business it is financing. Booking an instrument to a trading desk does not settle that assessment. The PRA’s current Pillar 2 methodology allows additional capital for illiquid, concentrated or one-way positions where Pillar 1 understates the risk; it examines firms’ stress assumptions and proposed mitigants.[4]

For lenders and counterparties, the regulatory assessment turns on documented valuation, exit conditions and controls as well as the hedge’s economic offset. The published rules explain the test; the available reporting does not establish whether Barclays met it in the transactions under review.[3]

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