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The feasibility of through-the-cycle ratings

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  • Kauko, Karlo

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 JEL classification numbers: G21, G33, L16

Suggested Citation

  • Kauko, Karlo, 2010. "The feasibility of through-the-cycle ratings," Research Discussion Papers 14/2010, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:2010_014
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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