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FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit

Which feature of private credit funds most complicates a supervisor's ability to assess how stress could propagate to banks?

Limited transparency is the key complication. Leverage, valuations and cross-exposures of private credit funds sit largely outside the regulated perimeter and are not publicly disclosed, so supervisors struggle to see how losses might transmit to banks.

  1. ADaily publicly quoted prices for all fund holdings
  2. BLimited transparency on leverage, valuations and cross-exposures held outside the regulated banking perimeterCorrect
  3. CMandatory standardized disclosure of all fund-level borrowing to banks
  4. DExclusive use of floating-rate loans, which removes credit risk

Explanation

Private credit holdings are typically illiquid, valued by models or managers, and reported with limited public disclosure, with leverage often hidden across structures. Daily public prices and standardized disclosure would ease monitoring. Floating-rate loans still carry credit risk, and higher rates can raise borrower stress.

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