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FRM Part II · FRM Exam Part II · Credit Scoring and Rating

A validator compares year-over-year rating migration for a bank's portfolio and finds that most obligors stay in their grade, but an unusually high share of downgrades occurs in recessions. The bank's ratings are described as point-in-time. Which statement is most consistent with this observation?

Point-in-time ratings reflect current conditions, so obligors migrate more and downgrades cluster in recessions, making the ratings procyclical. Through-the-cycle ratings aim to look past the cycle and migrate less, so the observed pattern is consistent with the stated philosophy rather than a model error.

  1. APoint-in-time ratings respond to current conditions, so they show higher migration and procyclicality than through-the-cycle ratingsCorrect
  2. BPoint-in-time ratings are stable across the cycle, so the observed downgrades indicate a model error
  3. CThrough-the-cycle ratings should show greater migration than point-in-time ratings
  4. DMigration patterns are unrelated to the rating philosophy

Explanation

Point-in-time ratings incorporate current economic conditions, so grades move with the cycle and downgrades cluster in recessions. Through-the-cycle ratings are designed to filter out cyclical effects and so migrate less. The pattern is therefore expected, not an error.

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