FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit
A risk manager at a pension fund is explaining why direct lending by non-bank private credit funds expanded in the years following the global financial crisis. Which statement best reflects the supply-side driver linked to post-crisis regulation?
Post-crisis regulation raised bank capital and leverage requirements, making riskier and less liquid loans, particularly to mid-sized leveraged borrowers, costlier for banks to hold. Banks retrenched from these segments, and non-bank private credit funds, facing lighter constraints, expanded to fill the resulting gap in lending.
- AHigher capital and leverage requirements on banks made certain loans, especially to riskier mid-sized borrowers, less attractive for banks to hold, creating space for non-bank lendersCorrect
- BLooser bank capital rules pushed banks to lend more to mid-sized firms, crowding out non-bank lenders
- CCentral banks banned banks from lending to leveraged borrowers, so no bank lending to such firms remained
- DRegulation required private credit funds to hold the same capital buffers as banks, which made them more competitive
Explanation
Tighter post-crisis bank capital and leverage rules raised the cost of holding riskier, illiquid loans on bank balance sheets. Banks retrenched from some segments, and non-bank lenders filled the gap. The other options reverse the direction of regulation or overstate it, since banks were not banned from such lending.
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