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

Which investor group is most often cited as having increased its allocation to private credit in a way that raises concern about interconnectedness with the traditional financial system, because of its liability profile and use of funding linkages to the vehicles?

Insurance companies are the group most associated with this concern. They hold private credit to match long-dated liabilities and often have affiliations with asset managers, creating channels through which stress in private credit can transmit to regulated financial institutions and the broader financial system.

  1. AInsurance companies, which hold private credit and may be linked to asset managers through affiliated structuresCorrect
  2. BRetail investors in money market funds with daily redemption
  3. CCentral banks investing reserves in direct loans
  4. DSovereign wealth funds that prohibit all leverage

Explanation

Insurers, often with affiliated asset managers, seek yield on long-dated liabilities and hold private credit, creating links to the regulated system. Money market funds and central banks are not primary holders, and sovereign wealth funds are not defined by a ban on leverage.

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