Credit Scoring modelling for retail banking sector.
Problem raised by Accenture
Coordinating teachers of the problem:
Ignacio Villanueva (Universidad Complutense de Madrid)
Estela Luna (Accenture)
Exposition of the problem
Credit
scoring is a systematic approach to the admission process of the retail banking
activity. It substitutes the traditional way, based on personal impression, of
admitting commercial operations involving loans, mortgages, credit cards etc.
It allows the bank to quantify the potential risk of default of every single
customer and use it to forecast the credit behaviour of incoming clients
Scheme of the work to be done:
2) Single factor analysis
Descriptive
Statistics of the main variables of the model. We will obtain mean, median,
standard deviation, kurtosis, skewness, maximum, minimum, 95 percentile, 5
percentile.
3) Multi factor analysis
We will obtain correlation between each variable and the default
variable. Highly correlated variables with default will be rejected because of
lacking of explanatory capacity.
Chi-square hypothesis testing to know independence between each variable
and default. Test statistic is:
4) Modeling
Probability linear models and non linear models are analyzed and we
select logit model for our case. Logit model is:
5) Model performance analysis
We obtained percentage of defaulted forecasted and non forecasted.
6) Validation of the model
We obtain Powerstat and RAR statistics with their confidence interval
7) Calibration of the model
Defaulted clients are counted, obtaining a yearly defaulted rate (YDR).
The main prupose of calibration is to determine the variables A, B and C of the
formula:
A, B and C must be obtained so to minimize root mean square error.
We perform Hosmer- Lemeshow test to know if the obtained formula adjusts
to the actual YDR. The statistic is:
, where
Oi=# of
defaulted
Ni=# of
clients in block i
= average
deafult probability in block i
8) Business analysis:
this part links the quantitative analysis performed in steps 1 through 7
to the general credit policies required by the bank to cover regulatory and
business goals. This point wraps up the overall activity.