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

A risk analyst reviewing the post-2008 growth of private credit notes that tighter bank capital and leverage rules raised the cost of holding certain leveraged and middle-market loans on bank balance sheets. Which statement best describes the expected effect on the credit market?

Non-bank lenders such as private credit funds gain market share. Post-crisis capital and leverage rules made some bank lending more costly, so banks pulled back, and funds with more patient, less regulated capital stepped in to serve the borrowers banks left behind.

  1. ANon-bank lenders such as private credit funds gain market share in segments where banks scale backCorrect
  2. BDemand for leveraged loans falls to zero because borrowers cannot find financing
  3. CBanks increase their direct holdings of riskier middle-market loans to preserve fee income
  4. DBorrowers shift entirely to public bond markets with no change in non-bank lending

Explanation

Higher capital costs made banks retrench from capital-intensive lending, particularly to riskier middle-market borrowers. Non-bank lenders with different funding structures filled the gap. The other options contradict this substitution pattern.

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