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

A supervisor is assessing systemic risk from the growth of private credit relative to banks and public markets. Which finding would most strongly indicate that risks are migrating back to the banking system rather than being fully transferred outside it?

Bank-provided back-leverage, subscription lines and revolving facilities to private credit funds show that risk is flowing back to banks. In stress, funds may draw on these lines, raising bank exposures and interconnectedness. Unlevered, locked-up, held-to-maturity structures would instead limit transmission to the banking system.

  1. APrivate credit funds hold only unlevered, closed-end senior loans funded by locked-up equity
  2. BBanks provide large back-leverage, subscription lines and revolving credit facilities to private credit funds and their borrowersCorrect
  3. CPrivate credit borrowers are mostly small and unrated
  4. DPrivate credit loans are held to maturity with infrequent valuation

Explanation

Bank lending to non-bank lenders creates interconnectedness: if private credit losses mount, funds may draw on bank facilities and bank exposures rise, so risk returns to banks. Unlevered, locked-up structures and held-to-maturity features limit transmission, and borrower size or being unrated does not itself link banks to the sector.

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