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

Banks increasingly provide credit lines to private credit funds and buy senior tranches of their loan pools. From a market structure viewpoint, what is the main risk-management implication?

Bank credit lines to, and tranche holdings in, private credit funds create interconnections, so stress in the non-bank sector can transmit back to banks. Risk is not removed from the system, and no automatic capital or insurance mechanism offsets it.

  1. ARisk has left the financial system entirely, so bank exposure is eliminated
  2. BInterconnections between banks and non-bank lenders create indirect channels for stress transmission to banksCorrect
  3. CBank capital requirements automatically rise to cover all fund losses
  4. DPrivate credit funds become subject to deposit insurance

Explanation

Bank lending to funds means private credit stress can feed back to banks through credit lines and tranche holdings. Risk is not eliminated, capital is not automatically raised, and deposit insurance does not apply to funds.

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