Skip to content

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

A bank has total loans of USD 400 billion, of which USD 20 billion are drawn credit lines to non-bank financial institutions (NBFIs) that lend to private credit borrowers. The bank also has USD 10 billion of undrawn committed lines to the same NBFIs. Under a stress scenario, 60% of the undrawn lines are drawn and the bank assumes a 5% loss on all drawn NBFI exposure after the draw. What is the stress loss on NBFI exposure?

The stress loss is USD 1.3 billion. Drawn exposure rises from 20 billion to 26 billion after 60% of the 10 billion undrawn lines is drawn, and a 5% loss on 26 billion gives 1.3 billion. Ignoring the additional draws understates the loss.

  1. AUSD 1.0 billion
  2. BUSD 1.3 billionCorrect
  3. CUSD 1.5 billion
  4. DUSD 0.8 billion

Explanation

Drawn after stress = 20 + 0.6 x 10 = USD 26 billion. Loss = 5% x 26 = USD 1.3 billion. Option A ignores the new draws (5% x 20). Option C applies 5% to all 30 billion including undrawn amounts not drawn.

Did you get it right without looking?

One question tells you little. A timed set on The Rise and Risks of Private Credit shows your real accuracy, how long you take and where you lose marks.

Practise The Rise and Risks of Private CreditFree diagnostic mock

More The Rise and Risks of Private Credit questions