The Feasibility of Through-the-Cycle Ratings

35 Pages Posted: 28 Aug 2010

Date Written: August 16, 2010

Abstract

It has been proposed that the potential procyclicality of Basel II could be alleviated by using through-the-cycle (TTC) ratings in IRBA models. A TTC rating would be based on the structural component of the debtor’s credit risk ignoring cyclical fluctuations. This paper tests for the existence of such fluctuations in corporate sector credit risk and finds virtually no evidence for their existence at the company level. It is not possible to assign satisfactory TTC ratings to debtors if there are no cyclical variations to be filtered out.

Keywords: through-the-cycle rating, credit risk, procyclicality

JEL Classification: G21, G33, L16

Suggested Citation

Kauko, Karlo, The Feasibility of Through-the-Cycle Ratings (August 16, 2010). Bank of Finland Research Discussion Paper No. 14/2010, Available at SSRN: https://ssrn.com/abstract=1666130 or http://dx.doi.org/10.2139/ssrn.1666130

Karlo Kauko (Contact Author)

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

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