HOW RATING AGENCIES ACHIEVE RATING STABILITY

Abstract

Surveys on the use of agency credit ratings reveal that most investors believe that rating agencies are relatively slow in adjusting their ratings. A well-accepted explanation for this perception on the timeliness of agency ratings is the "through-the-cycle" methodology, which agencies apply in their rating assessments, while investors have a "point-in-time" perception on the creditworthiness. The “through-the-cycle” methodology aims to suppress the sensitivity of the ratings to short-term fluctuations in credit quality. This article focuses on the migration policy of rating agencies as a second source of rating stability. In a benchmark study with credit scoring models we show that both the "through-the-cycle" methodology and the conservative migration policy are responsible for the investors' perception of the rigidity of agency ratings.