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

Analysts argue that tighter monetary policy can accelerate private credit's share of corporate lending relative to banks during certain periods. Which mechanism best supports this view?

Banks facing higher funding costs and regulatory constraints reduce lending, while private credit funds backed by long-term locked-in capital can keep lending and gain market share. The other mechanisms either reduce nonbank lending or are not supported.

  1. ABanks facing funding costs and regulatory constraints pull back, while nonbank lenders with locked-in long-term capital fill the gapCorrect
  2. BPrivate credit funds face immediate redemption runs that force them to lend more
  3. CCentral banks directly purchase private loans to support lending
  4. DCorporate borrowers shift entirely to public bond markets when rates rise

Explanation

When rates rise and bank funding or balance sheet pressure increases, banks tighten lending; private credit funds with long-lock-in capital can continue to lend and gain share. Redemption runs would shrink lending, central banks do not buy private loans, and bond market access is not universal.

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