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

A bank risk manager compares two ways private credit could affect bank stability: (1) direct bank lending to private credit funds and (2) banks competing less with private lenders for corporate borrowers. Which statement best reflects the systemic risk view on the rise of private credit?

Private credit shifts some lending away from banks, but banks remain exposed through financing to the funds. Because these links are often opaque and the funds can be leveraged, stress can concentrate and spread, so systemic risk is changed rather than eliminated.

  1. APrivate credit growth removes all systemic risk because funds use long-lock-up capital and cannot suffer runs
  2. BSystemic risk is confined to borrowers, since banks cannot be exposed to private credit funds
  3. CPrivate credit moves risk out of banks but banks stay exposed through financing to funds, which can concentrate and link risks opaquelyCorrect
  4. DSystemic risk arises only if private credit funds are listed on public exchanges

Explanation

Risk migrates to non-banks, yet banks remain linked via lending, credit lines and other financing. Opacity and leverage in the funds can amplify stress. Long lock-ups reduce run risk but do not remove credit, leverage or valuation risks. Banks clearly can be exposed.

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