IMF Research Bulletin, December 2013

Abstract

Credit rating agencies face a difficult tradeoff between delivering both accurate and stable ratings. While ratings should provide the most accurate estimate of the corresponding default risk of an underlying asset, users of ratings often prefer that they do not change too frequently. Rating agencies therefore generally assign ratings on a more stable "through-the-cycle" basis whereas banks' internal valuations are often based on a "point-in-time" perspective, reflecting the current value of a rated entity's or instrument's underlying assets. This article summarizes recent research that compares the two approaches and assesses their impact on rating stability and accuracy.