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FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit

A bank expands its lending to private credit funds through subscription and NAV-based credit lines. A risk officer wants to describe the main way this raises the bank's systemic exposure to the private credit sector. Which statement best describes it?

Bank lending to private credit funds creates indirect exposure to the funds' underlying borrowers, while the bank often sees little about fund leverage and portfolio quality. Investor commitments reduce risk but do not remove it, and the exposure remains credit risk rather than market risk or equity.

  1. AThe bank takes on indirect exposure to the underlying borrowers while having limited transparency into fund-level leverage and portfolio qualityCorrect
  2. BThe bank removes all credit risk because the loans are secured by fund investor commitments
  3. CThe bank's exposure becomes purely market risk because private credit assets are not traded
  4. DThe bank's regulatory capital requirement falls automatically because lending to funds is classed as equity

Explanation

Lending to private credit funds links the bank to the funds' underlying borrowers and leverage, often with limited disclosure. Security from investor commitments reduces but does not eliminate risk. The exposure is still credit risk, and no automatic capital relief or equity classification applies.

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