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

A risk manager at a pension fund is explaining why private credit funds expanded their share of middle-market corporate lending after the global financial crisis. Which statement best reflects the regulatory driver discussed in the literature on global private credit drivers?

Stricter post-crisis bank capital and leverage requirements made riskier corporate loans costlier for banks to hold, so banks pulled back from segments such as middle-market lending. Non-bank private credit funds, not subject to these bank rules, stepped in to fill the financing gap.

  1. ATighter bank capital and leverage requirements raised the cost of holding riskier corporate loans on bank balance sheets, leaving a gap that non-bank lenders filledCorrect
  2. BRelaxed bank capital rules encouraged banks to transfer all corporate loans to non-bank lenders at a profit
  3. CHigher deposit insurance limits caused firms to borrow only from non-bank lenders
  4. DCentral banks directly prohibited banks from lending to firms with below-investment-grade ratings

Explanation

Post-crisis reforms such as Basel III increased capital and leverage costs for riskier, illiquid loans. Banks retrenched from some segments, and private credit funds, which face no deposit-funding or bank capital rules, filled the gap. The other options describe regulatory changes that did not occur.

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