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

A risk analyst at a pension fund is asked to explain what distinguishes private credit from broadly syndicated leveraged loans. Which description is most accurate?

Private credit is non-bank lending, often by direct lending funds, negotiated bilaterally or with a small group of lenders and generally held to maturity with little secondary trading, unlike syndicated loans or public bonds that trade in liquid markets.

  1. APrivate credit is lending by non-bank institutions such as direct lending funds to firms, typically negotiated bilaterally or with a small club and held rather than traded in liquid marketsCorrect
  2. BPrivate credit consists only of bonds issued in public markets and rated by agencies
  3. CPrivate credit is loans originated by commercial banks and funded entirely by insured deposits
  4. DPrivate credit is lending by central banks to non-bank firms during stress

Explanation

Private credit is non-bank lending negotiated directly with borrowers, usually held to maturity and with limited secondary trading. Public rated bonds are public market instruments, and deposit-funded bank loans or central bank lending are not private credit.

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