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FRM Part II · FRM Exam Part II · Credit Risk

A credit rating system assigns borrowers to grades. An analyst compares a through-the-cycle (TTC) rating approach with a point-in-time (PIT) approach during a sharp economic downturn. Which outcome is most likely?

Point-in-time ratings migrate more and are more procyclical in a downturn. They incorporate current economic conditions and downgrade quickly, whereas through-the-cycle ratings focus on long-run, stressed-cycle assessments and stay comparatively stable, producing less rating migration.

  1. APIT ratings migrate more heavily and are more procyclical than TTC ratingsCorrect
  2. BTTC ratings migrate more heavily than PIT ratings
  3. CBoth approaches show identical migration since they use the same borrower data
  4. DPIT ratings remain stable because they ignore current conditions

Explanation

PIT ratings reflect current conditions and so downgrade quickly in a downturn, giving higher migration and procyclical capital. TTC ratings look through the cycle, using stressed-trough conditions, and are more stable. The TTC option is reversed.

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