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

A risk analyst at a pension fund studies why private credit assets under management expanded rapidly in the decade after the global financial crisis. Which macro-financial condition is most consistent with the demand-side explanation for this growth by institutional investors?

The best answer is persistently low yields on traditional fixed income. Investors facing compressed returns on public bonds searched for yield and moved into private credit, which offers an illiquidity premium. Higher rates and easier bank capital rules would not explain nonbank lending growth.

  1. APersistently low yields on traditional fixed income, prompting investors to seek higher-yielding illiquid assetsCorrect
  2. BA sustained rise in policy rates that made government bonds more attractive than loans
  3. CA decline in regulatory capital requirements for banks on corporate lending
  4. DA fall in corporate demand for external financing across all firm sizes

Explanation

Prolonged low interest rates compressed yields on public bonds, so institutions searched for yield and allocated to private credit, which pays an illiquidity premium. Rising policy rates would reduce, not raise, the relative appeal of loans. Lower bank capital requirements would favor bank lending, not nonbank growth.

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