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

A regulator observes that banks have increased credit lines to private credit funds and business development companies while private credit grows. Which risk is most directly highlighted by this bank–private credit linkage?

Bank lending to private credit funds and BDCs creates interconnectedness: stress in private credit can lead to credit line drawdowns and losses at banks. This produces hidden concentration and contagion risk rather than eliminating bank exposure to corporate credit.

  1. AReduced interconnectedness, since banks have exited corporate lending
  2. BEliminated credit risk for banks because the loans are now held by non-banks
  3. CHidden concentration and contagion risk, as stress in private credit could draw on bank credit lines and cause correlated lossesCorrect
  4. DLower systemic risk because private credit funds have no leverage

Explanation

Banks lend to private credit vehicles through credit lines and other facilities, so they retain indirect exposure. In stress, drawdowns and losses can transmit back to banks, creating interconnected, correlated exposures. The other options wrongly assume risk disappears or leverage is absent.

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