Others, adopting a similar approach to that of rating agencies, prefer so-called “across-the-cycle” evaluations, which consider the borrower’s position in a hypothetical unfavourable phase of the economic cycle. A specific probability of failure can be assigned to each internal rating class either on the basis of the bank’s own experience or by using information published by rating agencies on the frequency of failures.
With the globalization of financial markets, financial institutions around the world are exposed to a multiplicity of risks. Movements in the rates of interests and volatility of exchange rates in an increasingly complex environment have made the process of managing risks a critical aspect of treasury management.