UK regulators have taken action against Barclays, directing the bank to conduct a thorough review of its leveraged finance business amidst growing concerns within the Bank of England regarding how financial institutions are assessing their exposure to major private equity firms.
The Prudential Regulation Authority (PRA), a key regulatory body under the Bank of England, has mandated Barclays to initiate a section 166 review of its leveraged finance operations. This type of review requires the firm to engage an external expert to evaluate its practices independently and submit a detailed report to regulatory authorities. The outcome of such reviews can potentially trigger further regulatory measures if deficiencies are identified.
This move marks the beginning of a series of expected reviews into leveraged finance by the PRA. Leveraged finance, commonly used in financing private equity acquisitions, has raised concerns due to difficulties in accurately measuring risks associated with large private equity firms and their extensive portfolio companies. The PRA has recently instructed several banks to enhance their stress testing protocols to better assess risks linked to these relationships.
Barclays and representatives from the Bank of England declined to provide specific comments on the directive. However, the PRA had previously reminded banks of their obligation to meticulously identify, measure, and manage risks tied to private equity investments and the companies they support. The focus has been on improving stress testing capabilities, an area where the PRA has identified significant shortcomings among financial institutions.
Rebecca Jackson, the PRA’s executive director overseeing regulatory technology and international supervision, highlighted the inadequacies in stress testing practices within banks, stressing the importance of rigorous and comprehensive stress tests tailored to aggregate exposures related to private equity sponsors.
The outcome of Barclays’ review remains uncertain at this stage. Section 166 reviews can result in recommendations for substantial operational changes, potentially involving significant costs. The Bank of England is scheduled to release its Financial Stability Report later this month, which will include an updated assessment of the systemic risks posed by private equity activities to the UK financial system.
Overall, the regulatory scrutiny on Barclays underscores broader concerns within the financial industry regarding the robustness of risk management practices, particularly in relation to leveraged finance and private equity exposures. The outcome of these reviews will likely influence regulatory policies and operational strategies across financial institutions in the UK.