Intelligent Credit Scoring: Building and Implementing Better Credit Risk Scorecards

PRAISE FOR INTELLIGENT CREDIT SCORING

"Siddiqi offers a contemporary, step–by–step guide to developing and implementing successful in–house credit scorecards. He sets out the key concepts in an ordered and simple–to–follow fashion, supported by insightful worked examples. A must–read for anyone in risk management responsible for credit scoring."
Jonathan Baum, Chief Credit Officer, Lloyds Banking Group

"Siddiqi′s book is a must–read for anyone looking to develop scorecards in house, or who just needs a refresher on technique. Consumer Portfolio Services has benefitted tremendously from the knowledge and insights gained within these pages. I highly recommend this book as your trusted companion while on your educational journey into scorecard development!"
Rick Haskell, SVP of IT and Risk Management, Consumer Portfolio Services

"The author presents an integrated framework for development of Internal Scoring/Rating System for assessment and measurement of Credit Risk that really helps for implementation of Basel II IRB approach and IFRS–9 credit risk modeling."
Javed H. Siddiqi, Bsc(Hons), Msc(Physics), MBA(Finance), Head of Risk Management, Soneri Bank

"A great read for anyone interested in the evolution of credit scorecard development in the banking industry. Naeem also provides an expert view of the scorecard development process, usage, implementation, and the importance of monitoring. This book is an informative read for experienced and novice scorecard developers alike."
Daniel Bonomo, Vice President, Retail Risk Models, Scotiabank

"This is a timely and detailed update of the original edition, since the art and science of credit scoring has developed significantly. This edition retains its appeal to users given its simple to understand language, whilst covering complex technical content. The coverage of validating generic scorecards is relevant since in many locations customized scorecards may not be feasible."
Satinder Pal Singh Ahluwalia, Micro Business Director, PT Bank Danamon Indonesia, Tbk

"In this new edition, Naeem continues to offer very practical approaches and ideas which are pertinent now more than ever to financial institutions of various sizes. Organizations will find useful tools in this book to help them improve their development, use, and understanding of credit scoring models even if they aren′t developing their own. This book is a must for every professional credit risk manager."
Sylvain Fortier, CERA, ASA, Vice President and Chief Risk Officer, UNI Financial Cooperation

Chapter 1 Introduction 1

Scorecards: General Overview 9

Notes 18

Chapter 2 Scorecard Development: The People and the Process 19

Scorecard Development Roles 21

Intelligent Scorecard Development 31

Scorecard Development and Implementation Process: Overview 31

Notes 34

Chapter 3 Designing the Infrastructure for Scorecard Development 35

Data Gathering and Organization 39

Creation of Modeling Data Sets 41

Data Mining/Scorecard Development 41

Validation/Backtesting 43

Model Implementation 43

Reporting and Analytics 44

Note 44

Chapter 4 Scorecard Development Process, Stage 1: Preliminaries and Planning 45

Create Business Plan 46

Create Project Plan 57

Why Scorecard Format? 60

Notes 61

Chapter 5 Managing the Risks of In–House Scorecard Development 63

Human Resource Risk 65

Technology and Knowledge Stagnation Risk 68

Chapter 6 Scorecard Development Process, Stage 2: Data Review and Project Parameters 73

Data Availability and Quality Review 74

Data Gathering for Definition of Project Parameters 77

Defi nition of Project Parameters 78

Segmentation 103

Methodology 116

Review of Implementation Plan 117

Notes 118

Chapter 7 Default Definition under Basel 119

Introduction 120

Default Event 121

Prediction Horizon and Default Rate 124

Validation of Default Rate and Recalibration 126

Application Scoring and Basel II 128

Summary 129

Notes 130

Chapter 8 Scorecard Development Process, Stage 3: Development Database Creation 131

Development Sample Specification 132

Sampling 140

Development Data Collection and Construction 142

Adjusting for Prior Probabilities 144

Notes 148

Chapter 9 Big Data: Emerging Technology for Today s Credit Analyst 149

The Four V s of Big Data for Credit Scoring 150

Credit Scoring and the Data Collection Process 158

Credit Scoring in the Era of Big Data 159

Ethical Considerations of Credit Scoring in the Era of Big Data 164

Conclusion 170

Notes 171

Chapter 10 Scorecard Development Process, Stage 4: Scorecard Development 173

Explore Data 175

Missing Values and Outliers 175

Correlation 178

Initial Characteristic Analysis 179

Preliminary Scorecard 200

Reject Inference 215

Final Scorecard Production 236

Choosing a Scorecard 246

Validation 258

Notes 262

Chapter 11 Scorecard Development Process, Stage 5: Scorecard Management Reports 265

Gains Table 267

Characteristic Reports 273

Chapter 12 Scorecard Development Process, Stage 6: Scorecard Implementation 275

Pre–implementation Validation 276

Strategy Development 291

Notes 318

Chapter 13 Validating Generic Vendor Scorecards 319

Introduction 320

Vendor Management Considerations 323

Vendor Model Purpose 326

Model Estimation Methodology 331

Validation Assessment 337

Vendor Model Implementation and Deployment 340

Considerations for Ongoing Monitoring 341

Ongoing Quality Assurance of the Vendor 351

Get Involved 352

Appendix: Key Considerations for Vendor Scorecard Validations 353

Notes 355

Chapter 14 Scorecard Development Process, Stage 7: Post–implementation 359

Scorecard and Portfolio Monitoring Reports 360

Reacting to Changes 377

Review 399

Notes 401

Appendix A: Common Variables Used in Credit Scoring 403

Appendix B: End–to–End Example of Scorecard Creation 411

Bibliography 417

About the Author 425

About the Contributing Authors 427

Index 429

NAEEM SIDDIQI is the Director of Credit Scoring and Decisioning with SAS® Institute. He has more than twenty years of experience in credit risk management, both as a consultant and as a user at financial institutions. He played a key role in developing SAS® Credit Scoring and continues to provide worldwide support for the initiative.