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

An analyst argues that a regime of persistently higher rates and tighter bank regulation will reshape private credit. Which conclusion is best supported by this macro environment?

Bank retreat from leveraged lending tends to push borrowers toward non-bank lenders, supporting private credit growth, while persistently higher rates strain weaker, highly leveraged borrowers through higher interest burdens. Both effects operate together in this macro environment.

  1. ABanks retreating from some lending may further increase non-bank lending, but higher rates stress weaker leveraged borrowersCorrect
  2. BPrivate credit will shrink because it cannot charge floating rates
  3. CHigher rates reduce all borrower defaults because lenders become more selective
  4. DRegulatory tightening on banks will cut private credit demand to zero

Explanation

Tighter bank regulation has historically shifted leveraged lending to non-banks, while higher rates raise debt service burdens for leveraged borrowers. Other options contradict this logic: private credit commonly uses floating rates, and defaults do not fall automatically.

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