FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit
A regulator observes that bank retrenchment has shifted leveraged lending to private credit funds, but banks still provide those funds with credit lines and leverage. Which risk is the most direct implication for financial stability?
The key implication is interconnectedness. Even after lending shifts to non-banks, banks remain exposed through credit lines and financing provided to private credit funds, so stress in private credit could feed back to the banking system, meaning risk has migrated rather than vanished.
- AInterconnectedness: stress in private credit could return to banks through their lending exposures to non-bank lendersCorrect
- BElimination of credit risk because loans are held outside banks
- CLower liquidity mismatch because funds hold illiquid assets
- DReduced opacity because funds report like banks
Explanation
Risk migrates rather than disappears. Banks' credit lines and financing to private credit funds link the sectors, so losses or redemption pressures in private credit can transmit back to banks. Illiquid assets and limited disclosure typically increase, not reduce, opacity and mismatch concerns.
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