Bank of England regulators have warned lenders about “gaming the rules” with capital arbitrage transactions via their pension schemes, a move largely directed at Barclays, which has used such deals to boost its capital level.
On Wednesday, the Prudential Regulation Authority released a strongly-worded statement criticising the use of “deficit reduction transactions with their defined-benefit pension schemes that are structured to limit the regulatory capital impact”.
It said the tactics were legally risky, as well as “complex, artificial and opaque” in a way that “undermines the calibration” of capital levels.
“We also draw firms’ attention to the PRA’s approach . . . Our policies should be followed ‘in line with their spirit and intended outcome, not managing the business only to the letter, or gaming the rules’,” the regulator added.
While the statement did not single out any banks, people familiar with the matter said the main target was Barclays. Analysts at Autonomous and Numis said that it was the only UK lender that had used the tactic in recent years.
Barclays and the PRA declined to comment.
Should the PRA demand that the transactions be unwound, Barclays could take a £1.25bn hit to its core capital buffer years earlier than planned, according to analysts. That is equivalent, after tax, to a 30 basis point reduction from its current 15.1 per cent common equity tier 1 ratio.
The PRA warning comes at a tense time for Barclays and new chief executive CS Venkatakrishnan, who replaced Jes Staley in November after he resigned amid a probe into his relationship with convicted sex offender Jeffrey Epstein.
Late last month, the British lender said it would have to repay investors £450mn after mistakenly issuing an extra $15bn of financial products in the US than it had permission to.
The trading error forced it to delay a share buyback programme and is under investigation by regulators. Soon after, one of its largest shareholders, Capital Group, sold shares worth £900mn, causing the stock to fall.
“This is, once again, unhelpful and frustrating in equal measure,” Jonathan Pierce, Numis analyst, said of the PRA broadside. “If pulled forwards, it would lower the headline capital ratio in the near term and could reduce Barclays’ buyback potential in 2023.”
“A further near-term capital hit . . . certainly won’t help the shares,” Christopher Cant, Autonomous analyst, said in a report.
The capital arbitrage transactions in question are two deals done in 2019 and 2020, totalling £1.25bn. The trustees of Barclays Bank UK Retirement Fund were asked to invest in gilt-backed notes issued by a subsidiary to fund the pension deficit, delaying the capital impact until between 2023 and 2025.
Barclays clearly flagged the transactions and explained the rationale in earnings reports.
“It is unclear what exactly has triggered the PRA into action at this point,” Autonomous’s Cant said. “It seems possible that another bank was looking to mirror Barclays’ approach with a similar arbitrage transaction, prompting a fresh look from the regulator — if so, we assume today’s statement will prompt a swift reconsideration.”
