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

A credit analyst notes that a bank's internal rating system is 'through-the-cycle' (TTC) while a vendor's expected default frequency measure is 'point-in-time' (PIT). During a sharp economic downturn, which outcome is most likely?

Through-the-cycle ratings are stable across the economic cycle, while point-in-time measures respond quickly to current conditions. In a downturn PIT measures deteriorate more, so capital based on them is more procyclical than capital based on TTC ratings.

  1. ATTC ratings migrate more sharply than PIT measures, producing more volatile transition matrices
  2. BTTC ratings migrate less than PIT measures, so PIT-based capital would be more procyclicalCorrect
  3. CBoth approaches produce identical migration because they use the same default data
  4. DPIT measures stay stable while TTC ratings fall because TTC uses current market prices

Explanation

TTC ratings filter out cyclical effects and focus on long-run creditworthiness, so they change less in a downturn. PIT measures reflect current conditions and move quickly, making PIT-based capital more procyclical. The distractor reversing this confuses the definitions.

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