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FRM Part II · FRM Exam Part II · Fundamentals of Credit Risk

Rating agencies distinguish 'through-the-cycle' (TTC) from 'point-in-time' (PIT) rating philosophies. A bank compares its internal PIT ratings with agency TTC ratings over a recession. Which outcome is most consistent with these philosophies?

Point-in-time ratings reflect current conditions, so they migrate more and are more procyclical in a recession. Through-the-cycle ratings look past the cycle and are more stable, with grade-level default rates varying instead. The option reversing these roles is wrong.

  1. AAgency TTC ratings would show more migration than the bank's PIT ratings, since they react to current conditions
  2. BBoth systems would show identical migration because they use the same default definition
  3. CThe bank's PIT ratings would migrate more and be more procyclical, while TTC ratings would be more stableCorrect
  4. DThe bank's PIT ratings would remain stable while default rates of each grade fall in the recession

Explanation

PIT ratings incorporate current conditions, so obligors migrate downward in recessions and ratings are procyclical. TTC ratings aim to filter out cyclical effects and so are more stable, though the default rate within a grade varies with the cycle. The first option reverses the two philosophies.

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