A transition probability approach to credit ratings

This report is a compiled guide for the credit rating models of the three main credit rating agencies, describing the approaches to analyze the macro profile, individual bank profile, and the possible support from affiliate institutions or the government. Using the final credit ratings of the 10 biggest UK (United Kingdom) banks, it calculates and represents the transition probabilities matrixes between 2 ratings of the two out of the three agencies for a certain time period. It concludes that during struggling economic times, transition probabilities to a worst rating are more significant. Also, with a wider sample, there are more results that could be obtained. In the future, it would be interesting to have the third agency’s data, more UK banks and more years to better understand the quality of credit ratings.