Skip to content

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

A bank's internal rating system is designed so that a borrower's assigned grade changes little over the economic cycle, with ratings reflecting the borrower's expected condition through a full cycle and stressed conditions. Which description best fits this rating philosophy?

The description is through-the-cycle. TTC ratings look past temporary cyclical swings and reflect a borrower's condition through a full cycle, so grades are stable. Point-in-time ratings instead respond quickly to current conditions and migrate more during economic upturns and downturns.

  1. APoint-in-time, because grades respond quickly to current conditions
  2. BThrough-the-cycle, because grades are stable and look past temporary cyclical changesCorrect
  3. CPoint-in-time, because probabilities of default stay constant across grades
  4. DThrough-the-cycle, because migration rates rise sharply during recessions

Explanation

A through-the-cycle (TTC) approach assesses borrowers under stressed or average cycle conditions, so ratings are stable over time. Point-in-time (PIT) ratings use current conditions and migrate more with the cycle. The point-in-time options describe the opposite behavior of the one stated, and rising migration in recessions is a PIT feature.

Did you get it right without looking?

One question tells you little. A timed set on External and Internal Credit Ratings shows your real accuracy, how long you take and where you lose marks.

Practise External and Internal Credit RatingsFree diagnostic mock

More External and Internal Credit Ratings questions