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FRM Part II · FRM Exam Part II · Introduction to Credit Risk Modeling and Assessment

A bank compares through-the-cycle (TTC) and point-in-time (PIT) rating systems. Which outcome is most consistent with a TTC system during a sharp recession?

Under a through-the-cycle system, ratings stay relatively stable in a recession, so realized default rates within each grade rise. A point-in-time system would instead move borrowers between grades and keep grade default rates more constant.

  1. ARatings migrate rapidly and the default rate within each grade stays constant
  2. BRatings are relatively stable, while realized default rates within each grade riseCorrect
  3. CRatings are downgraded immediately and realized default rates in each grade fall
  4. DRatings become more volatile than under a PIT system

Explanation

TTC ratings assess creditworthiness over a full cycle and filter out temporary conditions, so grades change little in a downturn. The realized default rate in each grade therefore rises in recession. A PIT system would migrate borrowers more and keep grade default rates steadier.

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