PRA Requests Barclays to Assess Leveraged Finance Exposure Amid Industry-Wide Probe

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Britain’s Prudential Regulation Authority (PRA) has instructed Barclays to review its exposure to leveraged finance, according to a source familiar with the matter. This directive is part of a broader investigation into lenders’ exposure to the private equity industry.

The Bank of England highlighted in April that very few banks have a comprehensive understanding of their “holistic” exposures to private equity, potentially putting them at risk of significant losses. Rebecca Jackson, the central bank’s executive director for authorisations and international supervision, communicated to bank risk chiefs the standards they need to meet in assessing such risks. Despite these directives, a spokesperson for the PRA declined to comment on the current review.

The review will take the form of a section 166 report, which involves an independent skilled person examining the matter. This measure is a response to concerns about the global private equity sector’s risks, which are compounded by the opaque nature of leveraged finance.

A Bank of England official emphasized the need for global regulators to scrutinize the $8 trillion private equity sector more closely. The opaque leverage within this sector obscures the full extent of the risks it poses to financial stability. Private equity funds, which raise money from large institutional investors to invest in non-public companies, represent a more opaque funding method compared to public capital markets.

The assets under management in the private equity sector have surged, rising from approximately $2 trillion in 2013 to around $8 trillion in 2023. This significant growth has heightened regulatory concerns about the potential risks and exposures within the sector.

Bloomberg News initially reported the Barclays review on Friday, noting that the potential outcomes of the review remain unclear. This review is expected to be the first of many that the regulator will require from the industry. As regulators worldwide focus more on the private equity sector, the findings from these reviews could lead to substantial changes in how banks manage and disclose their leveraged finance exposures.

In summary, the PRA’s request for Barclays to review its leveraged finance exposure underscores the increasing regulatory scrutiny on the private equity sector. With significant growth in private equity assets under management, understanding and mitigating the associated risks has become a priority for financial stability.