Research Discussion Papers, Bank of Finland
No 14/2010:
The feasibility of through-the-cycle ratings
Karlo Kauko ()
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 vietually 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; (follow links to similar papers)
JEL-Codes: G21; G33; (follow links to similar papers)
32 pages, August 16, 2010
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