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

Supervisors worry that growth in private credit could amplify a credit downturn. Which factor would most increase this concern?

The concern rises most when borrower leverage is increasing and covenants are weak, valuations are opaque, and private credit is interconnected with banks and insurers. These conditions can conceal losses and spread stress through the financial system during a downturn.

  1. ALow leverage and diversified, long-term investor funding
  2. BGreater transparency and standardized public reporting of loan valuations
  3. CRising borrower leverage and weak covenants combined with opaque valuations and interconnections to banks and insurersCorrect
  4. DWider investor base consisting solely of sovereign wealth funds with no leverage

Explanation

Weaker underwriting standards, opacity and links to regulated institutions let losses be hidden and then transmitted widely. The other options all describe mitigating features such as low leverage, transparency or stable unlevered investors.

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