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

Which development would most likely reduce, rather than strengthen, the supply-side search-for-yield push of institutions into private credit?

A sustained rise in public bond yields would reduce the search-for-yield push, because institutions could reach their return targets using liquid assets and would need to take less illiquidity and credit risk to earn the required return.

  1. AA sustained rise in public bond yields that lets institutions meet return targets with liquid assetsCorrect
  2. BA prolonged period of policy rates near zero
  3. CGrowing pools of long-horizon capital seeking return enhancement
  4. DTighter bank capital requirements that leave borrowers underserved

Explanation

If public yields rise enough to meet return targets, institutions need less illiquidity premium and the incentive to seek yield in private loans weakens. Near-zero rates, large long-horizon capital pools and bank retrenchment all support private credit growth.

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