Bank of England regulators have warned lenders against ‘playing the rules’ with capital arbitrage deals through their pension schemes, a move largely directed at Barclays, which has used such deals to raise its level of capital.
On Wednesday, the Prudential Regulatory Authority issued a virulent statement criticizing the use of “deficit reduction operations with their defined benefit pension plans which are structured to limit the impact on regulatory capital”.
He said the tactics were legally risky, as well as “complex, artificial and opaque” in a way that “undermines the calibration” of capital levels.
“We are also drawing companies’ attention to the PRA approach. . . Our policies must be followed “in accordance with their spirit and the intended result, without running the business only by the letter or playing by the rules”, the regulator added.
Although the statement did not mention any banks, people familiar with the matter said the main target was Barclays. Analysts from Autonomous and Numis said it was the only UK lender to have used this tactic in recent years.
Barclays and the PRA declined to comment.
Should the PRA demand the deals be reversed, Barclays could take a £1.25bn hit to its core capital cushion years earlier than expected, analysts say. This equates, after tax, to a reduction of 30 basis points from its current Common Equity Tier 1 capital ratio of 15.1%.
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 an investigation into his relationship with convicted sex offender Jeffrey Epstein.
Late last month, the British lender said it would have to repay investors £450million after it mistakenly issued an additional $15billion of financial products in the US than it had permission to do.
The trading error forced him to delay a share buyback program and is being investigated by regulators. Shortly after, one of its major shareholders, Capital Group, sold shares worth £900m, causing the stock to plummet.
“It is, once again, unnecessary and frustrating in equal measure,” Numis analyst Jonathan Pierce said of the PRA campaign. “If pulled forward, it would reduce the overall short-term capital ratio and could reduce Barclays’ buyout potential in 2023.”
“Another short-term capital hit. . . certainly won’t help equities,” Autonomous analyst Christopher Cant said in a statement.
The capital arbitrage transactions in question are two transactions completed in 2019 and 2020, totaling £1.25 billion. Barclays Bank UK Retirement Fund trustees have been asked to invest in gilt-backed notes issued by a subsidiary to fund the pensions deficit, delaying the impact on capital between 2023 and 2025.
Barclays has clearly flagged transactions and explained the rationale in earnings reports.
“It’s unclear what exactly triggered the PRA’s action at this point,” Autonomous’ Cant said. “It appears possible that another bank was seeking to mirror Barclays’ approach with a similar arbitrage transaction, prompting a fresh look from the regulator – if so, we assume today’s statement today will result in a speedy reconsideration.”