Rating Philosophies: Some Clarifications

by Zoltan Varsanyi of the Magyar Nemzeti Bank

January 2007

Abstract: In this paper I try to give answers to some of the questions and problems that arise in relation to point in time (PIT) and through the cycle (TTC) rating philosophies. One of the most confusing of these is the definition of the two approaches that, as I argue, should be based on the scope of information behind the systems. Through a simple model I demonstrate that the results of quantitative analyses can be very sensitive to the definitions and, additionally, the stress concept applied. I analyze the role played by the rating philosophies in capital requirements calculations and stress tests, and touch on their implications on the pro-cyclicality of credit risk capital regulation.

JEL Classification: C1, G28.

Keywords: rating model, rating philosophy, stress test, pro-cyclicality.

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