medium · FRM Part 2 Credit Risk
A bank utilizes a 'through-the-cycle' (TTC) rating system. During a sharp economic downturn, what behavior should the risk department expect to observe in its credit ratings and realized default rates?
- Ratings will migrate upward as the bank tightens its underwriting standards during the crisis.
- Ratings migrate downward heavily, but realized default rates within each grade remain stable.
- Ratings remain stable, but realized default rates within each rating grade increase.
- Both ratings and realized default rates will remain stable due to the long-term calibration.
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