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

A regulator worries about the systemic implications of rapid private credit growth. Which concern is most directly supported by the market's structure?

The main concern is opacity: limited data on leverage, valuations and links to banks and insurers makes risks hard to monitor. Most private credit vehicles have locked-up capital, borrowers are often below investment grade, and bank linkages do exist.

  1. AOpacity and limited data on leverage, valuations and interconnections with banks and insurers make risks harder to monitorCorrect
  2. BPrivate credit funds are subject to daily redemption, creating run risk identical to money market funds
  3. CPrivate credit loans are all investment grade, so defaults would be negligible
  4. DPrivate credit is entirely isolated from banks, so no contagion channel exists

Explanation

Private credit is opaque, uses model-based valuations, may involve fund leverage, and is linked to banks through credit lines and to insurers through investments. Most funds are closed-end with locked capital, so daily-redemption run risk is not typical. Borrowers are mostly below investment grade, and links to banks exist.

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