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Internal Credit Ratings

  • At-The-Point (ATP) – Assesses for one year e.g. scoring models, KMV etc.
  • Through-The-Cycle (TTC) – Captures the credit-worthiness over a larger period of time, including the impact of normal cycles in the economy, these ratings are more stable
  • Some banks use TTC for large corporate and ATP for SME
  • One view is that TTC is the combination of various ATP at various time

Internal Ratings

  • Building Internal Ratings
    • Identify most meaningful factors
    • Assign weights to these factors
    • Calibrate these weights
    • Calibrating and back-testing
  • Issues in Back-Testing
    • There is no database when an internal rating system is designed
    • Generally a time of 10 to 18 years required to validate an internal rating system
    • APT will have pro-cyclicality if they stick to PD but will have unstable transition matrices and no long term guidance if they follow internal ratings

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