Barclays Investigation: Bank of England Probes Credit Risks

The Bank of England is examining allegations that Barclays traders misrepresented the risks associated with illiquid private credit loans, potentially understating the bank’s exposure, the Financial Times reported on Monday, October 19. The investigation follows a complaint reportedly submitted by an insider at the British bank earlier this year.

According to the FT, the complaint was received by the Bank of England’s Prudential Regulation Authority (PRA) and focused on how Barclays recorded derivatives used to finance private credit loans. The allegations raise questions about whether the bank’s classification of certain financial instruments accurately reflected the risks associated with the underlying assets.

The Bank of England declined to comment on the report. Barclays said it takes its regulatory obligations seriously but declined to provide further details about its interactions with the regulator.

Barclays Faces Scrutiny Over Private Credit Exposure

The complaint reportedly centres on Barclays’ allocation of total return swaps linked to illiquid private credit loans to its trading book. These financial instruments allow parties to exchange the economic returns and risks associated with an underlying asset without necessarily transferring ownership of that asset.

According to the Financial Times, the complaint questioned whether Barclays had appropriately classified these derivatives under the applicable regulatory framework. The report did not disclose the total value of the exposure involved.

Private credit generally refers to lending provided by non-bank financial institutions and private investment funds rather than through traditional public bond markets or conventional bank lending alone. Such loans can be difficult to sell quickly, particularly when market conditions deteriorate or buyers become less willing to take on credit risk.

The liquidity characteristics of these assets are important when banks assess their market exposure and determine how financial instruments should be classified. The reported complaint raises concerns about whether Barclays’ treatment of derivatives linked to these loans adequately reflected the underlying risks.

Prudential Regulation Authority Examines Derivatives Classification

The Prudential Regulation Authority is responsible for the prudential regulation and supervision of banks, insurers and certain other financial institutions in the United Kingdom. Its rules are designed to help ensure that regulated firms maintain appropriate risk management practices and sufficient financial resources to withstand losses.

The FT report said the complaint alleged that Barclays’ handling of the transactions breached PRA rules restricting banks from assigning derivatives backed by illiquid collateral to their trading books unless sufficient evidence supports that classification.

The distinction between trading-book and other regulatory classifications can affect how financial risks are measured and how much capital a bank must hold against particular exposures. The appropriate treatment depends on the characteristics of the instruments, the applicable regulatory requirements and the evidence supporting the bank’s classification.

Regulators scrutinise these classifications because an inaccurate assessment could make a bank’s risk profile appear lower than it actually is. However, the reported allegations have not established that Barclays breached any rules, and the details of the regulator’s examination have not been publicly confirmed by the Bank of England.

Why the Classification of Illiquid Loans Matters

The central regulatory concern described in the report is whether derivatives connected to illiquid private credit loans were treated as more readily tradable investments, potentially understating the risks associated with the underlying exposure.

Financial institutions use derivatives for several purposes, including hedging, financing and managing market exposure. Their regulatory classification can influence the way a bank calculates risk-weighted exposures and determines the capital it needs to maintain against potential losses.

If a financial instrument is classified in a way that does not accurately reflect its risk characteristics, the bank’s reported exposure and associated capital requirements could be affected. This is why regulators pay close attention to the documentation and justification supporting trading-book classifications.

Illiquid assets can create additional challenges because their market value and the ability to sell them may become less certain during periods of financial stress. If market conditions deteriorate, a bank could face greater difficulty reducing its exposure or finding counterparties willing to assume the associated risks.

The complaint reportedly questioned whether Barclays’ treatment of the derivatives adequately accounted for these considerations. The available report, however, does not establish the size of the disputed positions or the potential financial consequences.

Barclays Traders Reportedly Defended the Treatment

According to the Financial Times, Barclays traders argued that the exposure should be treated as a traded position because it was hedged through a matching swap with another counterparty.

A hedge is a financial arrangement intended to offset some or all of the risk associated with another position. A matching swap may reduce particular market exposures, depending on its terms and the risks being hedged.

However, the existence of a hedge does not automatically resolve every question about an asset’s liquidity, counterparty risk or regulatory classification. The appropriate treatment depends on the structure of the transactions and the requirements governing the relevant positions.

The reported disagreement therefore concerns how the derivatives should be classified under the applicable rules and whether the evidence supporting Barclays’ approach was sufficient. The regulator’s assessment, if confirmed, would determine whether the reported concerns warrant further action.

Barclays Responds to Regulatory Allegations

Barclays issued a brief statement in response to questions about the report, emphasising its commitment to meeting regulatory requirements.

“Barclays takes seriously its regulatory obligations in markets where it operates,” the bank said in an emailed statement to Reuters.

The bank declined to comment further on its interactions with the regulator. The Bank of England also declined to comment on the Financial Times report.

Neither institution publicly confirmed the details of the alleged complaint in the information provided. As a result, the reported concerns should be distinguished from any formal finding of misconduct or regulatory breach.

Barclays Shares Fall as Investors Assess the Report

Barclays shares were down 2.6% at 421.4 pence at 0750 GMT on Monday, according to the reported market data. The benchmark FTSE 100 index was also lower, declining 0.9% at the time.

The share-price movement came as investors assessed the report about the bank’s private credit exposure and the potential regulatory implications. Allegations involving risk management and regulatory compliance can attract market attention because they may raise questions about capital requirements, oversight and the possibility of additional scrutiny.

However, the reported declines alone do not establish that the allegations caused the market movements. Broader market conditions and other company-specific developments can also influence share prices.

The potential financial impact of the matter remains unclear because the report did not disclose the amount of exposure involved or indicate whether the PRA had reached any conclusions.

What the Report Could Mean for Banking Risk Oversight

The reported complaint highlights the importance of accurate risk classification as banks increase their involvement in complex financing arrangements connected to private credit markets.

Private credit has become an important source of financing for businesses, while derivatives can help financial institutions structure transactions and manage exposure. These arrangements can also create complex relationships between underlying loans, hedging instruments and regulatory capital calculations.

For supervisors, the challenge is to ensure that banks’ internal risk assessments and regulatory classifications reflect the economic characteristics of their positions. Effective oversight requires institutions to maintain adequate documentation and demonstrate that their treatment of financial instruments complies with the relevant rules.

If the PRA identifies weaknesses in Barclays’ approach, any subsequent regulatory response would depend on the facts established and the applicable requirements. The available report does not indicate whether enforcement action is being considered.

Investigation Remains at the Allegation Stage

The Financial Times report describes a complaint received by the Prudential Regulation Authority earlier in 2026 concerning Barclays’ treatment of derivatives linked to illiquid private credit loans. The allegations focus on whether the instruments were appropriately allocated to the bank’s trading book and whether that treatment complied with regulatory rules.

Barclays has said it takes its regulatory obligations seriously but has declined to comment further. The Bank of England has also declined to comment on the report.

Until further details emerge, the scale of the disputed exposure, the regulator’s findings and any potential consequences remain uncertain. The case nevertheless illustrates why the classification of complex financial instruments and the treatment of illiquid assets are important issues for banking supervisors and investors.