The Bank of England is conducting an investigation into Barclays over concerns regarding the bank’s handling of loans linked to the private credit sector. The review, initiated earlier this year by the regulator’s Prudential Regulation Authority (PRA), follows a complaint from an insider about how Barclays classified financial contracts known as total return swaps—derivatives often used to finance private credit loans.

The core issue under scrutiny is Barclays’ reported placement of these contracts in its trading book rather than its banking book. This classification is significant because assets in the trading book can be sold more readily and typically attract lower capital requirements compared to those held in the banking book, which institutions usually retain for longer periods. Critics argue that misallocating illiquid private credit loans to the trading book could understate the underlying risk and result in the bank holding insufficient capital reserves, potentially boosting profitability artificially.

Barclays traders reportedly defended their decision to treat the exposure as a traded position, a stance that could conflict with PRA rules. The regulator restricts the categorization of illiquid loans in the trading book unless backed by adequate evidence, aiming to prevent what it described last year as “imprudent” attempts to game capital rules that might lead to undercapitalization of risks. In communications to finance directors, the PRA emphasized that repackaging illiquid assets into tradable formats alone is insufficient justification for such classification without supporting proof.

The private credit market has attracted increasing regulatory scrutiny amid concerns over valuations, lending standards, and potential contagion risks to traditional banks. Private credit firms, which rely on investor capital rather than customer deposits to fund loans, operate with less regulatory oversight—a factor that worries some analysts and regulators. Barclays, like other banks, has expanded its exposure to this market, lending directly to private credit firms and their funds as well as to companies simultaneously borrowing from these firms.

The sector has faced challenges in recent years, including high-profile failures involving private credit-backed companies such as the U.S. automotive firms Tricolor and First Brands, both implicated in fraud allegations, and the UK mortgage lender Market Financial Solutions, which collapsed earlier this year. Barclays recorded losses connected to these defaults, including a £228 million charge linked to the MFS collapse.

Shares in Barclays declined 3.5% recently, extending losses amid broader concerns about banking profits and in anticipation of potential tax changes in the upcoming Budget. Chancellor John Healey is reportedly considering reinstating the bank surcharge to 8% from the 3% level set last year.

Barclays has reiterated its commitment to regulatory compliance but has declined to comment in detail on the ongoing investigation. The Bank of England also declined to provide comment. The inquiry comes under the oversight of the PRA’s chief, Katherine Braddick, who was previously a senior adviser and strategic policy head at Barclays; she has been recused from all Barclays-related regulatory matters until 2026. Barclays is scheduled to release its latest financial results in the near term, in what is expected to be a closely watched update amid growing scrutiny of risk management in the private credit sphere.