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

A regulator is assessing financial stability risks from rapid private credit growth. Which concern is most directly tied to the sector's growth and structure?

The main stability concern is opacity combined with interconnections: banks lend to private credit funds and insurers invest in them, so stress can transmit through the system while limited data and model-based valuations make risks hard to see.

  1. AOpacity and interconnections with banks and insurers, through bank lending to private credit funds and insurers' allocations, could transmit stress with limited visibilityCorrect
  2. BPrivate credit funds are so liquid that they cause immediate fire-sale spirals in public markets
  3. CPrivate credit is funded entirely by retail deposits that can be withdrawn on demand
  4. DPrivate credit loans are all investment grade, so credit losses are negligible

Explanation

Key concerns include limited data, valuation opacity, leverage, and linkages with banks and insurers. The loans are illiquid, not highly liquid, and funds are mostly funded by long-term capital rather than demand deposits. Borrowers are often leveraged and below investment grade.

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