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FRM Part I · FRM Exam Part I · External and Internal Credit Ratings

A bank compares two rating philosophies for its corporate borrowers. Which statement best describes a through-the-cycle (TTC) rating approach as opposed to a point-in-time (PIT) approach?

A through-the-cycle rating evaluates a borrower under stressed, trough-of-cycle conditions and changes only when long-run credit quality changes. It is therefore stable across the cycle, unlike point-in-time ratings, which respond to current conditions and fluctuate with economic expansions and recessions.

  1. ATTC ratings respond quickly to changes in current market prices and so fluctuate with the economic cycle
  2. BTTC ratings assess default risk using stressed, trough-of-cycle conditions and change only when the borrower's long-run credit quality changesCorrect
  3. CTTC ratings are based only on equity-market-implied default probabilities updated daily
  4. DTTC ratings estimate the default probability over the next month using current macroeconomic indicators

Explanation

TTC ratings look past the current phase of the cycle and evaluate a borrower under stressed or trough conditions, so they migrate only when permanent credit quality changes. The first option describes PIT behaviour, which reflects current conditions and moves with the cycle.

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