Skip to content

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

A study finds that, after stricter post-crisis regulation, the fall in bank lending to leveraged borrowers was larger in jurisdictions with more stringent capital requirements and that private credit grew more there. Which interpretation is most consistent with this evidence regarding regulatory arbitrage?

Risk migrates to less-regulated entities. Where capital rules were tighter, banks retreated more and private credit grew more, indicating that the regulatory perimeter determines where credit risk is held rather than eliminating it, which raises financial stability monitoring concerns.

  1. AStricter regulation reduces overall credit risk because risky lending disappears from the financial system
  2. BRisk migrates to less-regulated entities, so the regulatory perimeter shapes where credit risk resides rather than eliminating itCorrect
  3. CPrivate credit growth is unrelated to bank regulation and is driven solely by investor demand
  4. DBank retrenchment shows that banks have no remaining role in leveraged finance

Explanation

The correlation between stricter rules and private credit growth suggests activity moved outside the regulated perimeter. Risk was relocated, not removed. Claiming it disappears ignores the growth of non-bank lending, and a purely demand-driven story ignores the cross-jurisdiction pattern.

Did you get it right without looking?

One question tells you little. A timed set on The Global Drivers of Private Credit shows your real accuracy, how long you take and where you lose marks.

Practise The Global Drivers of Private CreditFree diagnostic mock

More The Global Drivers of Private Credit questions