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

A risk manager at a pension fund is briefing the board on why private credit has grown rapidly since the global financial crisis. Which explanation best reflects the drivers of that growth?

Private credit grew largely because stricter post-crisis bank regulation and capital rules made banks pull back from some leveraged and middle-market lending, while yield-seeking investors supplied capital to non-bank lenders. It was not due to a lending ban, bank-style capital rules on funds, or daily liquidity.

  1. ATighter post-crisis bank capital and regulatory requirements reduced banks' appetite for some leveraged lending, while investors sought higher yields from non-bank lendersCorrect
  2. BCentral banks banned banks from lending to middle-market firms, forcing borrowers to use non-banks
  3. CPrivate credit funds are subject to the same capital rules as banks, which makes them cheaper lenders
  4. DPrivate credit grew because it offers daily liquidity to investors, unlike public bond markets

Explanation

Post-crisis regulation raised the cost of bank leveraged and middle-market lending, creating space for non-bank lenders, while low yields pushed investors toward higher-yielding private loans. No outright ban existed, private credit funds are not bank-style capital regulated, and the assets are illiquid rather than daily-liquid.

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