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

A pension fund's risk committee is reviewing why direct-lending private credit funds expanded rapidly after the global financial crisis. Which factor is most consistently cited as a structural driver of this growth?

Private credit grew largely because tighter post-crisis bank capital and regulatory requirements led banks to pull back from some leveraged and middle-market lending. Non-bank lenders such as direct lending funds filled the gap, facing lighter prudential constraints than banks.

  1. ABanks reduced some leveraged lending because of tighter post-crisis capital and regulatory requirements, leaving a gap that non-bank lenders filledCorrect
  2. BRegulators imposed stricter capital rules on non-bank direct lenders than on banks, pushing borrowers toward them
  3. CPublic bond markets closed permanently to mid-sized firms, leaving no other source of funding
  4. DPrivate credit funds are required by law to hold only investment-grade loans, which attracted borrowers

Explanation

Post-crisis bank regulation raised the capital cost of leveraged and middle-market lending, and non-bank lenders stepped in. The second option reverses the regulatory burden, since non-bank lenders generally face lighter prudential rules. The third and fourth are factually wrong.

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