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FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit

A regulator examines the funding structure of private credit vehicles. Compared with banks, which characteristic of closed-end direct lending funds is most relevant to financial stability assessments?

Closed-end private credit funds rely on long-term locked-up investor capital, which reduces run risk compared with deposit-funded banks. Vulnerabilities persist through fund-level leverage, bank credit facilities and infrequent, opaque valuations, so interconnections with banks still matter for stability.

  1. AThey fund themselves mainly with demandable deposits, creating run risk similar to banks
  2. BThey rely on long-term locked-up capital from investors, which limits run risk at the fund level, though leverage and bank credit lines can still create vulnerabilitiesCorrect
  3. CThey are exempt from any interconnection with banks because they never borrow
  4. DThey must mark all loans to market daily, causing immediate price transparency

Explanation

Closed-end funds draw on committed, locked-up capital so redemption runs are limited. Risks remain from fund leverage, bank credit lines and opaque valuations, linking them to banks. Deposits and daily marks do not apply.

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