FRM Part II · FRM Exam Part II · Credit Risk Management
A credit risk analyst compares a bank's internal rating system with an agency's external ratings. The bank's system is designed to estimate each borrower's default probability over the next 12 months using current conditions, and ratings change quickly as new information arrives. Which description best fits this system?
The system is point-in-time. It estimates 12-month default probability from current conditions, so ratings migrate quickly with the economic cycle. Through-the-cycle ratings instead filter out temporary fluctuations and stay relatively stable, which is the opposite of the behavior described.
- AThrough-the-cycle, because it ignores current conditions to focus on long-run averages
- BPoint-in-time, because ratings reflect current conditions and migrate with the cycleCorrect
- CThrough-the-cycle, because ratings are stable across the economic cycle
- DPoint-in-time, because ratings are designed to remain unchanged during recessions
Explanation
A point-in-time system uses current information and a short horizon, so ratings and PDs move with the cycle. Through-the-cycle ratings are designed to be stable and look past temporary shocks. The through-the-cycle options describe the opposite behavior.
Did you get it right without looking?
One question tells you little. A timed set on Credit Risk Management shows your real accuracy, how long you take and where you lose marks.
More Credit Risk Management questions
- Under the Basel internal ratings-based (IRB) framework, which statement about the capital charge for a corporate exposure is correct?
- A bank takes financial collateral against a loan. Which feature most strongly increases the risk that the collateral will fail to mitigate l…
- A credit analyst reviews a manufacturer applying for a five-year term loan. Which finding would most directly indicate weak debt service cap…
- A bank's board sets a credit risk appetite statement. Which feature would make it most effective in controlling portfolio risk?
- A bank lends USD 10 million to a corporate borrower. The one-year probability of default is 2%, the loss given default is 45%, and the expos…
- A risk analyst compares a bank's internal rating system with an agency's external ratings. The bank wants ratings that reflect the borrower'…