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FRM Part II · FRM Exam Part II · Fundamentals of Credit Risk

A bank compares through-the-cycle (TTC) and point-in-time (PIT) rating approaches for its corporate book during a sharp recession. Which outcome is most consistent with the bank's PIT ratings relative to agency-style TTC ratings?

PIT ratings are more procyclical and show more downgrades during a recession because they incorporate current conditions. TTC ratings aim to be stable by looking through the cycle, so they migrate less and respond more slowly.

  1. APIT ratings show less migration and lower correlation with the economic cycle
  2. BPIT ratings are identical to TTC ratings because both use the same default horizon
  3. CPIT ratings show more procyclical migration, with more downgrades during the recessionCorrect
  4. DPIT ratings ignore current financial conditions and focus on long-run average stress

Explanation

PIT ratings reflect current conditions and so respond quickly to the cycle, producing more downgrades in a recession and procyclical capital requirements. TTC ratings look through the cycle, assess stressed-trough conditions and are more stable. The other options reverse these properties.

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