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

An analyst studies a country where banks faced sharply higher capital requirements, while a neighbouring country did not. Consistent with evidence on the drivers of private credit, what would the analyst most likely expect to observe in the first country, relative to the second?

The analyst would expect faster private credit growth in the country with tougher bank capital rules. Constrained banks reduce lending to riskier borrowers, who turn to non-bank private credit funds that are not subject to bank capital requirements, which is regulatory arbitrage in effect.

  1. AFaster growth of private credit funds, as borrowers shift from constrained banks to non-bank lendersCorrect
  2. BSlower growth of private credit funds because borrowers' demand for credit disappears
  3. CIdentical private credit growth, since regulation does not affect financing choices
  4. DA fall in private credit because non-bank lenders must also hold bank-style capital

Explanation

Evidence indicates stricter bank regulation and bank retrenchment are associated with greater private credit activity, as borrowers and capital move to unconstrained non-bank lenders. Non-banks are not subject to bank capital rules, so the last option is wrong, and demand does not vanish.

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