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

A supervisor wants to assess whether stress in the private credit sector could spill over to regulated banks. Which approach would be most informative?

The supervisor should map banks' direct and indirect exposures to private credit funds and non-bank lenders, such as credit lines and financing links, and then run joint stress scenarios. Looking only at direct holdings would miss key transmission channels, and long-term funding does not eliminate spillover risk.

  1. AMap bank exposures to private credit funds and non-bank lenders, including credit lines and indirect links, then run joint stress scenariosCorrect
  2. BRely only on the banks' direct holdings of private loans on their balance sheets
  3. CReview only the funds' marketing documents for investor disclosures
  4. DAssume no spillover because private credit is funded by long-term investors

Explanation

Spillover arises through direct and indirect links such as credit lines, derivatives, and co-lending, so exposures should be mapped comprehensively and stressed jointly. Looking only at direct holdings misses most channels, and long-term funding does not rule out leverage or redemption stress.

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