Rating migration

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-06

// THE SHORT ANSWER

Rating migration is the movement of borrowers between risk grades over a period, read across a portfolio as downgrades against upgrades, or as a matrix showing where the borrowers in each grade ended up a year later. It moves before defaults do, so portfolio managers and supervisors watch it for drift towards the weaker grades, which raises provisions under expected credit loss accounting and, at banks that set capital from their own ratings, the capital the book uses. An average grade can hold steady while a book slides: 30 downgrades and 5 upgrades among 200 borrowers is a net 25 files moving towards higher risk, whatever the mean says.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.