Revisiting the Dualism of Point-in-Time and Through-the-Cycle Credit Risk Measures

Credit risk measures are often described as being either point-in-time (PIT), through-the-cycle (TTC) or a hybrid thereof. Nevertheless, it is generally accepted that there is no consensus about the meaning of these terms, although several studies have repeatedly tried to formalize them. In the present study, I therefore take a step back and first revisit the origins of both PIT and TTC, which recapitulates that the terms have been vague from the outset. Thereafter, I analyse how various banking regulators and the IASB have used them and potentially influenced their meaning. This reveals that the standard setters too have adopted PIT and TTC quite distinctively, which has further amplified their fuzzy meaning. In particular, both the literature and standard setters have used PIT and TTC not only to denote rating philosophies or obligor-specific default probabilities, but also to describe the pooled default probability of a rating class or a portfolio. However, even after taking into account these two different connotations, a variety of -- sometimes contradictory -- interpretations coexist. I argue that these discrepancies ultimately reflect the heterogeneity and flexibility of credit risk models, which apparently cannot be reduced to a single dimension as the dualism between PIT and TTC implies