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

Which valuation-related risk is most commonly highlighted for private credit portfolios from a financial stability perspective?

Infrequent, model-based valuations can delay loss recognition and understate risk. Private loans do not trade on liquid markets, so marks rely on models and appraisals. This opacity can hide credit deterioration until stress becomes severe, which matters for financial stability.

  1. AInfrequent, model-based valuations can delay recognition of losses and understate riskCorrect
  2. BDaily exchange prices make valuations excessively volatile
  3. CValuations are set by central banks
  4. DValuation is unnecessary because loans are floating rate

Explanation

Private loans lack liquid markets, so valuations rely on models and appraisals updated infrequently. This can delay recognising credit deterioration and mask risk. Private loans do not trade on exchanges, central banks do not value them, and floating rates do not remove valuation need.

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