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

A bank's risk committee is reviewing its growing lending to private credit funds through subscription and NAV-based facilities. Which risk is most directly heightened by this bank-to-nonbank link in a stress scenario?

Interconnectedness is heightened. Banks lend to private credit funds through credit lines, so in stress the funds may draw down while asset values fall, transmitting nonbank losses and liquidity demands back into the banking system.

  1. AInterconnectedness, because losses and drawdowns on committed credit lines can transmit stress from nonbank lenders back to banksCorrect
  2. BReduced counterparty concentration, because lending is spread across many fund investors
  3. CElimination of liquidity risk, because private credit funds are closed-end vehicles
  4. DLower correlation with public credit, because private loans are never marked to market

Explanation

Bank lending to private credit funds creates linkages: in stress, funds may draw on credit lines while asset values fall, transmitting losses to banks. The other options wrongly claim risk reduction or elimination. Closed-end structure reduces run risk in the fund but does not remove bank exposure.

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