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

Which feature of private credit funds most explains why they could step in as banks retrenched from certain lending after the global financial crisis?

Private credit funds rely on long-term, locked-up capital from institutional investors, which suits illiquid loans and avoids run-prone deposit funding. They are also outside bank capital and liquidity rules, which allowed them to take over lending that banks scaled back.

  1. ATheir funding is typically long-term committed capital from investors, avoiding run-prone short-term deposit liabilitiesCorrect
  2. BThey are covered by deposit insurance
  3. CThey are subject to the same liquidity coverage ratio as banks
  4. DThey can access central bank lender-of-last-resort facilities routinely

Explanation

Private credit funds raise locked-up capital from institutional investors, which matches their illiquid loan assets and is not subject to bank capital and liquidity rules. They lack deposit insurance, are not subject to the LCR, and have no routine central bank access.

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