• Embed Doc
  • Copy Link
  • Readcast
  • Collections
  • CommentGo Back
Download
 
Managing Risks in Consumer Credit Industry
 A working paper submitted to “Policy Conference on Chinese Consumer Credit” on August 7, 2004 in Beijing, China
Jack Niu
1
Executive Vice PresidentMBNA AmericaWilmington, DelawareU.S.A.June 2004
Abstract
In the past 10 years, the value of consumer credit industry in the US has doubled reachinga spectacular level of US$2,000+ trillion by 2003. Meanwhile, the risk management of consumer lending industry has been becoming more and more critical to protect theinterest of both lenders and consumers. The risks of consumer credit industry consist of two major categories: credit risk and systemic risk. Both risks are tightly related to theregulatory environment of this industry. This paper focuses on the practice of credit risk management, the systemic risk prevention, and the corresponding regulatory measures.Case studies and practices in credit card will be used to illustrate these focus points.During the recent two decades, the credit risk management strategies, especially for creditcard, have been becoming more and more sophisticated with the availability of statisticalmodels, credit scores, and analytical tools. Automatic credit decision-making strategiesin acquisition underwriting and complicated portfolio risk management strategies havebeen widely utilized by consumer lending institutions for most of their products, i.e. autoloans, home equity loans, and credit cards, etc. On the other hand, regulations and lawsin this industry have correspondingly enhanced to prevent systemic risk proactively. Inthis paper, risk management theory and case studies will be discussed to demonstrate theimportance of credit risk management. In addition, this paper will briefly review China’sconsumer credit market, and provide a cross-examination on consumer lendingregulations between the US and China. Recommendations on risk control means and keyregulatory improvements in China will be made as well.
Keywords:
credit risk, systemic risk, charge-off, credit bureau, risk score, auto loans,credit card, credit insurance, and consumer credit regulations, etc.
 
1
The author would like to thank the conference organizers Professor Bruce L. Reynolds and his assistantsof the Department of Economics, University of Virginia and Professors Justin Yifu Lin and Minggao Shenof the China Center for Economic Research (CCER). The author is also grateful to the sponsors of theconference – the CCER, the Chinese Economist Society, the International Finance Corporation, the FileneResearch Institute, the Center for Credit Union Research at University of Wisconsin, and CUNA MutualGroup in the USA. The views and conclusions in this paper only represent the author’s own opinion. Theauthor reserves all rights. Please send correspondence directly to: jniu@comcast.net via email.
 
Table of ContentsList of Tables.....................................................................................................................3
 
List of Figures....................................................................................................................3
 
Part 1. Introduction.........................................................................................................4
 
Part 2. Managing Underwriting Risk, Portfolio Risk and Systemic Risk..................5
 
2.1 A Brief Review of the US Consumer Credit Market..................................................6 
 
2.2 Risk Assessment and Credit Scores...........................................................................10
 
2.3 Managing Underwriting Risk...................................................................................13
 
2.4 Managing Portfolio Risk and Using Automation System.........................................17 
 
2.5 Decomposing the Dollar Loss Rate within an Organization....................................21
 
2.6 Managing Systemic Risk and the Role of Consumer Credit Regulations & Laws....23
 
2.7 Summary...................................................................................................................25
 
Part 3. Case Studies on Credit Card............................................................................26
 
3.1 Citibank in India: Launching Credit Card in an Emerging Market........................26 
 
3.2 LG Card of Korea: a Lesson for China’s Consumer Credit Market........................28
 
3.3 NextCard of USA: An Innovator’s Cost....................................................................31
 
3.4 Summary...................................................................................................................32
 
Part 4. Chinese Consumer Credit Industry.................................................................33
 
4.1 A Brief Review of the Chinese Consumer Credit Market.........................................33
 
4.2 Credit Risk Management...........................................................................................37 
 
4.3 Cross-examination on Regulations and Laws...........................................................37 
 
4.4 Recommendations.....................................................................................................37 
 
4.5 Summary...................................................................................................................37 
 
Part 5. Conclusions........................................................................................................37
 
Appendices.......................................................................................................................38
 
Appendix A. Tables........................................................................................................38
 
Appendix B. Figures......................................................................................................43
 
Appendix C. Best Practice of Risk Management in a Credit Card Operation........52
 
Appendix D. References and List of Internet Links...................................................52
 
Acknowledgement...........................................................................................................54
 
Biography of the Author................................................................................................55
 
 
List of TablesTable 1. Sample FICO Score Odds...............................................................................38
 
Table 2. Sample List of Risk Scores..............................................................................39
 
Table 3. Illustrative Underwriting Risk Criteria for Auto Loans..............................39
 
Table 4. Illustrative Roll-Rate Tracking.......................................................................40
 
Table 5. US Consumer Credit Regulations and Laws.................................................41
 
Table 6. A Cross-Examination of Regulations and Laws in China and the US........42
 
List of FiguresFigure 1. The US Consumer Credit Market and Players............................................43
 
Figure 2. Sample Credit Card Transaction Flow........................................................44
 
Figure 3. The ABS Trend in the US..............................................................................45
 
Figure 4. Illustrative Model Development Process......................................................46
 
Figure 5. Logistic Function............................................................................................47
 
Figure 6. Comparison of the Power of Scores at the same Score Cut-off..................47
 
Figure 7. Illustrative Credit Card Direct Mail Risk Screening Flow.........................48
 
Figure 8. The Distribution of 2002 Credit Card Market in India..............................49
 
Figure 9. Recent LG Card NPL and Charge-Off Rate Trend....................................49
 
Figure 10. Comparison of Roll-Rates between LG Cards and Sample US Banks....50
 
Figure 11. Comparison of the 3 Cases in Risk Management......................................50
 
Figure 12. China's 4-Tier Banking System...................................................................51
 
of 00

Leave a Comment

You must be to leave a comment.
Submit
Characters: ...
You must be to leave a comment.
Submit
Characters: ...