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 |
References