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

Which feature of private credit funds most plausibly makes them better able than banks to hold illiquid, riskier loans after regulation raised bank capital costs?

Their longer-term, locked-up capital. Because investors cannot withdraw on demand, funds face less run risk and need fewer liquidity buffers, so they can hold illiquid, riskier loans that banks find costly under tighter post-crisis capital and liquidity regulation.

  1. AThey rely on demandable deposits that are insured by the government
  2. BThey have longer-term or locked-up capital, which reduces run risk and the need for liquidity buffersCorrect
  3. CThey are subject to the same risk-weighted capital requirements as banks
  4. DThey hold only publicly traded liquid securities

Explanation

Private credit funds typically raise capital with lock-ups and multi-year horizons, so liabilities match illiquid assets and run risk is lower. Banks fund with demandable deposits and face binding capital rules. The other options describe bank features or liquid assets.

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