UK regulators have ordered Barclays to review its leveraged finance business as concern grows inside the Bank of England over how lenders across the industry are measuring their exposure to the giants of private equity.
The central bank’s Prudential Regulation Authority has instructed Barclays to commission a section 166 review of the business, according to people familiar with the matter. These reviews force a firm to bring in an outside expert to examine their practices and produce an independent report for the authorities, which can then prompt further action if necessary.
It’s the first of many such reviews the regulator is expected to launch into leveraged finance, which has long been the financing method of choice for private equity buyouts, one of the people said, asking not to be identified discussing non- public information. It comes as the PRA has found a number of banks were unable to measure their exposure to private equity giants and their portfolio companies and ordered them to begin stress testing those relationships in recent weeks.
Representatives for Barclays and the Bank of England declined to comment.
In April, the PRA reminded lenders’ chief risk officers in a letter that it expects them to “comprehensively identify, measure, combine, and record risks” tied to buyout funds and the companies they back.
“On stress testing, unfortunately I do not have a huge amount to say,” Rebecca Jackson, the PRA’s executive director for authorizations, regulatory technology, and international supervision, said at the time. “Not because we found that firms are excellent at it, or because we think it’s unimportant, but because we found that hardly any banks do it well in this context. Very few firms carry out routine, bespoke and comprehensive stress testing for aggregate sponsor related exposures.”
It’s unclear what, if any, outcomes the review at Barclays will have at this time. Section 166 reviews can lead to reports recommending changes, which in some cases can prove large-scale and expensive.
Later this month, the Bank of England is scheduled to publish its Financial Stability Report, a twice yearly update on financial risks. The central bank has previously said the report will offer a fresh analysis of the danger that private equity may pose to the health of the UK’s financial system.
