Which of the following is not a true statement about internal credit ratings?
A. The "at-the-point-in-time" approach makes heavy use of econometric modeling that relates current financial variables to estimated default risk.
B. The "through-the-cycle" approach is forward-looking and attempts to incorporate future economic scenarios into current default risk estimates.
C. "At-the-point-in-time" credit scores volatility is much higher than "through-the-cycle" score volatility.
D. A sound internal system uses at-the-point-in-time scoring for small-to-medium-sized companies and private firms and through-the-cycle scoring for large firms.
Answer:D
The approaches are not compatible or directly comparable, and using the two approaches for different firms can yield highly inconsistent and misleading results.