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

Which evidence would best support the claim that private credit growth reflects bank retrenchment rather than only strong borrower demand?

The best supporting evidence is that private credit grew most in segments where banks lost market share and faced higher regulatory capital costs, such as riskier mid-sized leveraged borrowers. This pattern points to substitution for retreating banks rather than demand alone, which would lift all lenders alike.

  1. APrivate credit expanded most in segments, such as leveraged loans to riskier mid-sized firms, where bank market share fell and bank capital costs roseCorrect
  2. BPrivate credit expanded equally in all segments regardless of bank share
  3. CPrivate credit expanded only when bank lending also expanded at the same pace
  4. DPrivate credit expanded mainly in segments where banks increased their market share

Explanation

A retrenchment explanation predicts growth of non-bank lending where banks pulled back and where regulation raised their costs. Uniform growth or growth alongside rising bank share would point to demand-side or other factors.

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