Rating Through-the-Cycle: Implications for Rating Stability and Accuracy. Empirical evidence

Abstract

Through-the-cycle (TTC) ratings attempt to discriminate between high and low risk borrowers by forecasting large adverse changes in credit quality under conditions of moderate stress. While the TTC methodology increases rating stability relative to market ratings, it is an open empirical question whether stable ratings come at the cost of lower accuracy. Using a novel and large dataset of banks' internal TTC ratings provided by the Global Credit Data Consortium, we fail to find evidence of an accuracy-stability tradeoff. These findings are robust over time and across asset classes.

Keywords: credit ratings, through-the-cycle, rating accuracy, rating stability