Designing and Implementing a Basel II Compliant PIT-TTC Ratings Framework

by Scott D. Aguais of Barclays Capital,
Lawrence R. Forest Jr. of Barclays Capital,
Martin King of Barclays Capital,
Marie Claire Lennon of Barclays Capital, and
Brola Lordkipanidze of Barclays Capital

January 27, 2008

Introduction: Since the first edition of The Basel Handbook was published in early 2004, major internationally active banks around the world have continued to engage in substantial projects for designing and implementing the extensive Basel II framework. To achieve the advanced internal ratings based (AIRB) status, banks need to develop a variety of credit models that estimate, for each obligor, probability of default (PD) and, for each credit exposure or facility, loss given default (LGD) and exposure at default (EAD). In developing the required PD models, many banks have had to redesign or refine their risk-rating approaches. In this process, banks have found it necessary to determine whether various PD measures are "point-in-time" (PIT), "through-the-cycle" (TTC) or a hybrid, somewhere between PIT and TTC.

JEL Classification: G32.

This paper is republished as Ch.10 in...

Download paper (289K PDF) 33 pages