Point-in-time versus Through-the-cycle

From Open Risk Manual

Point-in-time versus Through-the-cycle

Point-in-time versus Through-the-cycle, two key design elements (philosophies) of credit rating systems are compared and contrasted. So called hybrid systems may lie somewhere between the two designs.

Aspect Point-in-time Through-the-cycle
Who is applying which system Financial firms Rating agencies, Financial firms
What are the primary uses Pricing, Portfolio Management, Stress Testing, IFRS 9 Reporting Underwriting, Regulatory Capital
Which predictive variables are included Both static / slowly varying and dynamic Only static / slowly varying
What happens to the forecast PD in a downturn Increases Remains the same
What happens to the rating in a downturn Deteriorates Remains the same
What happens to the rank ordering of risks during downturn Might change Remains the same
How does it impact estimated risk capital for banks Volatile Stable
Can rating cut-off be used to set business segmentation criteria or limits No Yes
How is the PD correlated in time with credit spreads Some positive correlation Little correlation
Is there a unique approach to obtain this design No No
How can estimates be validated Comparison with realizations over short periods Comparison with realizations over long periods


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