Skip to content

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

A regulator argues that rapid private credit growth could raise financial stability concerns even though funds use less leverage than banks. Which combination of observations best supports concern about the sector's growth?

The strongest case for concern combines opaque valuations and limited data, growing links to banks through credit lines and financing to funds, and weakening underwriting from competition for deals. Long lockups, strong covenants and greater transparency are mitigating factors rather than sources of risk.

  1. AOpaque valuation and limited data, rising interconnectedness with banks via credit lines to funds, and loosening underwriting standards amid competition for dealsCorrect
  2. BPredominantly long lockups, low fund-level leverage, and strong covenants across all loans
  3. CHeavy reliance on retail daily-redemption vehicles with public pricing
  4. DDeclining borrower concentration and rising transparency of loan marks

Explanation

Financial stability concerns stem from opacity, bank-nonbank linkages (credit lines and leverage to funds) and weaker underwriting as capital floods in. Long lockups, strong covenants, transparency and diversification are mitigants, not concerns.

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