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    AnatomyofCreditScoring Girault 2008

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    Rocio Bramajo
    This document discusses credit scoring models, which are algorithms that assess credit risk. They are commonly used by financial institutions to evaluate loan applicants and existing customers. Some common types of credit scoring models include probit, discriminant analysis, and logistic regression models. Credit scoring models can be used to evaluate both retail and corporate obligors, though they are more commonly used for retail customers. The results of credit scoring models provide a risk measure that allows comparison of credit risks across individuals. To demonstrate how a credit scoring model works, the document estimates a sample model using Argentina's public credit registry data to predict repayment behavior and default among retail borrowers.

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    AnatomyofCreditScoring Girault 2008

    Uploaded by

    Rocio Bramajo
    26 views3 pages
    This document discusses credit scoring models, which are algorithms that assess credit risk. They are commonly used by financial institutions to evaluate loan applicants and existing customers. Some common types of credit scoring models include probit, discriminant analysis, and logistic regression models. Credit scoring models can be used to evaluate both retail and corporate obligors, though they are more commonly used for retail customers. The results of credit scoring models provide a risk measure that allows comparison of credit risks across individuals. To demonstrate how a credit scoring model works, the document estimates a sample model using Argentina's public credit registry data to predict repayment behavior and default among retail borrowers.

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    This document discusses credit scoring models, which are algorithms that assess credit risk. They are commonly used by financial institutions to evaluate loan applicants and existing customers. Some common types of credit scoring models include probit, discriminant analysis, and logistic regression models. Credit scoring models can be used to evaluate both retail and corporate obligors, though they are more commonly used for retail customers. The results of credit scoring models provide a risk measure that allows comparison of credit risks across individuals. To demonstrate how a credit scoring model works, the document estimates a sample model using Argentina's public credit registry data to predict repayment behavior and default among retail borrowers.

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    © All Rights Reserved
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    26 views3 pages

    AnatomyofCreditScoring Girault 2008

    Uploaded by

    Rocio Bramajo
    This document discusses credit scoring models, which are algorithms that assess credit risk. They are commonly used by financial institutions to evaluate loan applicants and existing customers. Some common types of credit scoring models include probit, discriminant analysis, and logistic regression models. Credit scoring models can be used to evaluate both retail and corporate obligors, though they are more commonly used for retail customers. The results of credit scoring models provide a risk measure that allows comparison of credit risks across individuals. To demonstrate how a credit scoring model works, the document estimates a sample model using Argentina's public credit registry data to predict repayment behavior and default among retail borrowers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Anatomy of credit scoring models

    Matías Alfredo Gutiérrez Girault


    Central Bank of Argentina

    Summary

    Introduced in the 70’s, the use of credit scoring techniques became widespread
    in the 90’s thanks to the development of better statistical and computational
    resources. Nowadays almost all the financial intermediaries use these
    techniques, at least to originate the credits they grant.

    Credit scoring models are algorithms that in a mechanical way assess the
    credit risk of a loan applicant or an existing bank client, by means of statistical,
    mathematic, econometric or artificial intelligence developments. They are
    focused on the borrower’s creditworthiness or credit risk, regardless of his
    interaction with the rest of the portfolio. Although all of them yield fairly similar
    results, those most commonly used are probit and discriminant analysis models,
    lineal and logistic regressions, and decision trees.

    Credit scoring models can be used to evaluate retail and corporate obligors.
    However, in general they are used to evaluate the retail portfolio, whereas
    corporate obligors are assessed with rating systems. Besides using different
    explanatory variables, the assessment of corporate borrowers implies revising
    qualitative aspects of their business that are difficult to standardize. Therefore
    the result of their assessment is better expressed with a rating.

    When financial institutions use these models to grant credits, they are referred
    to as application scorings. Banks use behavioral scorings to manage their
    loan portfolio, for example in setting credit limits, marketing products and
    evaluating the risk and risk adjusted profitability of existing clients. Financial

    BCRA | ENSAYOS ECONÓMICOS 50 | ENERO - MARZO 2008 | 63


    intermediaries commonly use generic credit scores, which evaluate the overall
    credit risk of a loan applicant, without taking into consideration the
    characteristics of the requested credit. However, some credit scores are aimed
    at getting more precision in the risk estimates: they are designed to forecast
    the risk of individuals applying for specific credits, such as residential mortgages.
    Credit scores can be estimated with external or pooled data, such as bureau
    scores, or with internal data by the banks themselves or external consultants.

    Regardless of how credit scores are constructed, their result is condensed in


    a credit risk measure that allows to compare and rank order the individuals
    according to their perceived risk, as well as to quantify it. In general, they
    assign a score, classification or rating.

    To clarify how credit scores are constructed and used, with the information
    contained in the BCRA’s public credit registry (Central de Deudores del Siste-
    ma Financiero (CENDEU)) we estimate a sample credit score and show how it
    operates with a probit model. The CENDEU has detailed information of all
    borrowers in the financial system, such as their ID, business sector, type of
    borrower, risk rating, outstanding debt with each bank, type of credits, amount
    of financial and real collateral, etc. This credit score predicts the repayment
    behavior of retail borrowers in the financial system: individuals and small and
    medium enterprises. The only purpose of this model is to show some stylized
    facts of credit scores, and by no means seeks to establish or indicate what
    are the best practices in their use, construction or interpretation.

    To estimate the model, for each of the years in the 2000-2006 period we chose
    those retail borrowers that at the beginning of each year were not in default.
    Having defined our target population, comprised by slightly more than 32.600.000
    borrowers, we draw a random sample of 20%. Although it is not the purpose of
    this paper to discuss how these models can be validated, the remaining 80%
    of the data can be used to perform out-of-sample tests to evaluate the reliability
    of the model. The variable to be explained is the situation of default (or not) of
    the borrowers by the end of each year, which gives the probability of default
    (PD) an annual dimension. Some explanatory variables are: risk rating at the
    outset of each year, credit history, worst rating in the financial system, type of
    creditor, type of borrower, number of banks with which the borrower has debts,
    GDP growth, outstanding debt with the bank, outstanding debt with the financial

    64 | ANATOMÍA DE LOS MODELOS DE CREDIT SCORING


    system, degree of collateralization of the exposures. All these variables were
    computed with the information at the CENDEU.

    In general, all the estimated coefficients have the expected sign. For example,
    borrowers that at the beginning of each year were risk classified as 2 are
    riskier than those that were rated as 1: their PD is 22,7% higher. Estimates
    also show that the worse the borrower’s rating in the financial system, the
    higher his PD. The dummy for the existence of real or financial collateral
    indicates that these borrowers have a lower PD. Finally, estimates for GDP
    growth indicate that on average higher economic growth reduces the PD in
    approximately 36%.

    JEL: C25, G32.

    Key words: credit risk, credit scoring, binary probit.

    BCRA | ENSAYOS ECONÓMICOS 50 | ENERO - MARZO 2008 | 65

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