Barclays is curbing some of its riskier lending to so-called ‘shadow banks’ after taking a £228million hit on a collapsed UK mortgage provider.

The Market Financial Solutions (MFS) charge pushed the sum Barclays has set aside for souring loans up by 28 per cent to £823million – its biggest quarterly spike since the start of the pandemic six years ago.

It follows a £110million loss the bank recently made on its exposure to US sub-prime auto lender Tricolor, which raised fears about lax financial controls.

‘This again raises fears over whether lending standards have slipped,’ said Russ Mould, investment director at stockbroker AJ Bell. 

In a separate blow, Barclays hiked by £105million the amount set aside to cover compensation claims from the industry-wide motor finance mis-selling scandal, taking the total the bank is now on the hook for to £430million.

Boss CS Venkatakrishnan, known as Venkat, said he was ‘disappointed’ with the write-off at MFS, which he claimed was the victim of a ‘sophisticated fraud’.

The write-down means the bank hopes to get back just over half of what it to lent to MFS as Barclays and other creditors fight to find and recover billions of pounds in loans they made to the failed mortgage firm. 

As a result, Venkat vowed to restrict lending to parts of the unregulated ‘shadow bank’ system, where Barclays revealed it has £66billion at risk.

‘I don’t like to lose a single dollar or a single pound to fraud,’ Venkat said. But he added that Barclays can ‘absorb it’ by improving how these risks are managed.

The ‘non-bank’ sector, which includes private equity groups and insurers, has expanded rapidly since the 2008 financial crisis after conventional lenders withdrew from making riskier loans to firms.

But watchdogs are concerned that mainstream banks are becoming increasingly inter-connected with these non deposit-taking lenders, which may pose a threat to the entire financial system. 

Barclays still posted a 3 per cent rise in first quarter profits to £2.8billion, in line with traders’ expectations.

Net interest margin – the difference between what a lender charges borrowers and pays savers on their deposits – jumped to 3.72 per cent, up from 3.55 per cent a year earlier.

Like other High Street banks, Barclays has benefited from higher-for-longer interest rates, enabling it to make more money for little or no extra risk.

The bonanza has led to calls for a windfall tax on banks to plug a hole in the public finances. 

But Venkat said banks were more highly taxed than they are in any other major country and played ‘an important role’ in encouraging growth.