Skip to content

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

Which feature of the private credit sector is most often cited as making its links to banks and insurers a potential source of systemic risk, despite the sector's relatively small size compared with the banking system?

Opacity is the key concern: limited data on leverage, valuations and cross-exposures, together with rapid growth and funding links to banks and insurers, makes risk build-up hard to see. Private credit loans are not marked daily and funds are not deposit-funded or subject to bank capital rules.

  1. AOpacity and limited data on leverage, valuations and cross-exposures, combined with rapid growth and funding links to regulated institutionsCorrect
  2. BMandatory daily mark-to-market pricing that causes sharp price swings
  3. CHeavy reliance on retail deposits that are insured by governments
  4. DStrict regulatory capital requirements that make funds procyclical

Explanation

Limited transparency on leverage, valuation and interconnections, along with fast growth and funding ties to banks and insurers, makes risks hard to monitor. Option B is wrong because private loans are typically valued infrequently using models. Options C and D describe features private credit funds largely lack.

Did you get it right without looking?

One question tells you little. A timed set on The Rise and Risks of Private Credit shows your real accuracy, how long you take and where you lose marks.

Practise The Rise and Risks of Private CreditFree diagnostic mock

More The Rise and Risks of Private Credit questions