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

A regulator reviewing the rapid growth of private credit funds is concerned that a downturn could transmit stress to banks. Which channel best describes how banks are exposed to private credit even when they do not hold the loans directly?

Banks are exposed indirectly through financing they provide to private credit funds and non-bank lenders, such as credit lines and leverage facilities. Stress in the funds can therefore pass back to bank balance sheets even though banks do not hold the underlying private loans.

  1. ABanks provide leverage lines and credit facilities to private credit funds and non-bank lendersCorrect
  2. BBanks are barred from lending to funds, so exposure arises only through deposit outflows
  3. CPrivate credit loans are always traded on exchanges, so banks face mark-to-market losses on them
  4. DBanks hold the equity tranche of every private credit fund by regulation

Explanation

Banks are linked to private credit through credit lines, back-leverage and subscription facilities extended to funds and non-bank lenders. A downturn that hurts these borrowers can create losses for banks and tighten funding for the sector. The other options describe mechanisms that do not exist or are factually wrong.

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