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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 expanded rapidly since the global financial crisis. Which factor is most consistent with the standard explanation for this growth?

Private credit grew largely because post-crisis bank regulation and capital requirements led banks to pull back from some middle-market and leveraged lending, and non-bank lenders stepped into that gap. Banks were not banned from lending, and private credit funds are not bound by bank capital rules.

  1. ABanks faced tighter post-crisis capital and regulatory requirements, leading them to retreat from some middle-market lending that non-bank lenders then filledCorrect
  2. BCentral banks prohibited banks from holding corporate loans, forcing all lending into non-bank vehicles
  3. CPrivate credit funds became subject to the same capital rules as banks, making them cheaper lenders
  4. DPublic bond markets closed permanently to mid-sized borrowers because of the elimination of credit ratings

Explanation

Tighter bank capital and regulation after the crisis reduced banks' appetite for some leveraged and middle-market lending. Non-bank lenders such as direct lending funds filled that gap. The other options describe prohibitions or rule changes that did not occur.

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