SC3-Chapter 20 - Managing Credit Risk on the Balance Sheet 3

# SC3-Chapter 20 - Managing Credit Risk on the Balance Sheet...

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3/17/11 11 Quantitative or Statistical Credit Scoring Advances in computer technology in the late 1970’s led to an interest in the development of statistical models that could be used to identify key accounting variables that could distinguish between borrowers that good credit risks and those that were likely to default or become delinquent To build a scoring model, developers utilize historical information from loan applications and credit bureaus to determine which borrower characteristics

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3/17/11 22 Quantitative & Statistical Credit Scoring Statistical analysis of credit scores define cutoff values for use in future credit decisions Scores reflect probability of borrower default key quantitative measures that are statistically correlated with default statistically based decision rules (important demonstrating that borrowers are being discriminated with)
3/17/11 Quantitative Credit Scoring Question?: Which of the following alternatives is better/worse? a. Rejecting a loan that if accepted would have been paid in full (i.e. not defaulted) 1) cost= lost revenue (much of which could be replaced with another loan) a. Accepting an applicant and making a loan that will end up in default in the future

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3/17/11 Credit Scoring This suggests that any decision should be biased toward rejection of marginal applicants That is, we would like to be able to predict which loans are likely to default with a high degree of accuracy, so we don’t make them.
3/17/11 55 Quantitative Credit Scoring Z-Score Analysis Uses Historical Data on actual loan performance (default vs non-default) (Original research (Edward Altman) consisted of a series of statistical tests using 22 initial ratios and data on 316 distressed companies for the years 1969-1999) Assigns the dependent variable, Z, values as follows: Z = 1 if the loan does not default (pays out)

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## This note was uploaded on 03/16/2011 for the course FIN 4324 taught by Professor Clark during the Spring '11 term at FSU.

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SC3-Chapter 20 - Managing Credit Risk on the Balance Sheet...

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