Skip to content

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

A regulator reviewing the private credit sector notes that banks have increased lending to non-bank financial institutions, including private credit funds, through credit lines and subscription facilities. Which risk is most directly heightened by this growing bank exposure to private credit vehicles?

The main risk is interconnectedness. When banks lend to private credit funds through credit lines and similar facilities, stress in those funds can transmit to banks through losses and drawdowns, linking the regulated and non-bank sectors rather than isolating them.

  1. AInterconnectedness that can transmit stress from private credit funds back to the regulated banking sectorCorrect
  2. BElimination of bank credit risk because the borrowers are professionally managed funds
  3. CReduced liquidity risk for banks because fund commitments are fully drawn at origination
  4. DLower correlation between bank and non-bank credit losses in all stress scenarios

Explanation

Bank lending to private credit funds creates linkages through which losses or liquidity strains in the funds can flow back to banks. Lending to professional managers does not remove credit risk. Undrawn commitments can be drawn in stress, and correlations tend to rise rather than fall in stress.

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