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Credit Scoring Development and Methods: James Marinopoulos Head of Retail Decision Model
Credit Scoring Development and Methods: James Marinopoulos Head of Retail Decision Model
James Marinopoulos
Head of Retail Decision Model
Customer fails
to pay
Change in
Losing money market
Wrong Strategy prices
Regulatory compliance
S e n i o r S e n i o r S e n i o r
D e c i s io n M o d eD l e M c ia s n i o a n g eM r o d S e y l s M t e a m n sa g A e s r s u r a n c e M a n a g e
( D e v e l o p m e n t s ( )V a l i d a t i o n s )
Q u y e n P h a m - N N g i uc hy eo nl a s Y a n n Gi o sr a e m e J u d d
G r a d u a t e M a n a g e r
J a n e t L o n g D e c i s i o n M o d e l V a l i d a t i o n
K a t h y Z o v k o
M a n a g e r
D e c i s i o n M o d e l M o n i t o r i n g
V a l e n t i n a D r a g a n
G r a d u a t e
M a r i a D e m e t r i o u
ScorecardModelling
Scorecard Modelling
Business Objectives
Business Objectives
WorldBanks
World Banks
Monitoring
Monitoring
FutureDirection
Future Direction
Credit
Decision
Debit $1344. 12
Debit $234.
Debit $1344.
01 12
Debit $234.
Debit
Debit
$1344. 12
$987.56 01
Risk
Debit $234. 01
Debit $6543.22
$987.56
Debit Grading
Debit $6543.22
Debit $987.56
Debit $32423.11
Debit$32423.11
Debit $6543.22
Total $2556.00
Debit
Total $32423.11
$2556.00
Total $2556.00
Application Financial
Purpose of loan Assets
Deposit Liabilities
Security Monthly repayment
Total Monthly income
Bureau Character
No. of bureau defaults Time at current employment
Adverse ANZ behaviour Residential status
Time at current address
■ The difference being that attributes within these characteristics are given
formal weights (scores) and added to produce a resulting score
Retail Decision Models
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Group Risk - Retail Risk
Scorecard points (example)
Residential status
Owner Renter LWP/Other
+25 -30 +10
Total defaults
No Defaults 1 2+
0 -70 -250
ScorecardModelling
Scorecard Modelling
Business Objectives
Business Objectives
WorldBanks
World Banks
Monitoring
Monitoring
FutureDirection
Future Direction
Bads
120
160
240
280
360
440
480
560
600
680
720
760
800
200
320
400
520
640
40
80
0
Score
40
0
80
120
160
200
240
280
320
360
400
440
480
520
560
600
640
680
760
800
720
Score
16400 14
Graph 2 - Log Odds Performance Chart
12
3250
10
645
Good/Bad Odds
25 3
2 to 1 4
8 to 1
5 2
0 0
0
40
80
120
160
200
240
280
320
360
400
440
520
560
640
680
720
760
480
600
800
Retail Decision Models
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Group Risk - Retail Risk
Application Scorecard Construction
Flow Chart
Outsourcing
Data Integrity •External Data Source
•Product Identification •Scorecard Vendor
•File Data Availability
•Sampling
•Data Extraction/Cost Generic Scorecard
Implementation
Customised Scorecard
Scorecard Monitoring
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Group Risk - Retail Risk
Model Build
■ Once the characteristics have been selected a statistical
model can be developed.
■ Multivariate statistical methods include
– Logistic Regression
– Stepwise methods
– Residual analysis
■ Not all predictive characteristics are used in the model.
– An inter-correlation effect may exist between variables.
– For example, age may be correlated with time at current
employment and therefore only one is necessary in the model.
p
= ∑ j =0 β j x j
k (
exp ∑ j =0 β j x j
k
)
ln
■
1− p
Neural Networks
p=
(
1 + exp ∑ j =0 β j x j
k
)
0.8
0.6
0.4
0.2
0
0 200 400 600 800 1000
0.8
0.6
0.4
Good/Bad Probability
0.2 Logistic
Linear (Good/Bad Probability)
0
0 200 400 600 800 1000
1
ROC = (G + 1)
2
■ PH (percentage Good for 50% Bad)
– This is defined as the cumulative proportion of Goods up to the median value
of the Bads.
12/01/10
Retail Decision Models Gini.xls 23
Group Risk - Retail Risk
Measures of discrimination – (I)
• Scorecard performance can be Lorenz C urve
0.9
discrimination 0.8
Cumulative Bads
Gini (or ROC)
0.6
0.5
of bads 0.3
0.2
• 1% of PH could mean an additional 0.1
3% approvals 0
0 0.2 0.4 0.6 0.8 1
Gi
– Fico (Kullback Divergence)100∑ (Gi − Bi ) ln
Bi
Based on a book by Solomon
Kullback
“Information Theory and Statistics”
ScorecardModelling
Scorecard Modelling
Business Objectives
Business Objectives
WorldBanks
World Banks
Monitoring
Monitoring
FutureDirection
Future Direction
ScorecardModelling
Scorecard Modelling
Business Objectives
Business Objectives
WorldBanks
World Banks
Monitoring
Monitoring
FutureDirection
Future Direction
Personal Loans Y - - Y Y Y
Current A ccounts Y - Y - Y Y
Credit cards Y - - Y Y Y
? A pp Scrds
Scorecards 20 - 70 ? 50 (12)
1 Beh Scrds
U nder
Application scorecards N ew New New All All
Developm ent
Best 40% > 6 m onths on
B ehavioural scorecards Existing - Product Just Developed
Existing B ooks
ScorecardModelling
Scorecard Modelling
Business Objectives
Business Objectives
WorldBanks
World Banks
Monitoring
Monitoring
FutureDirection
Future Direction
100%
Auto Declined
90% Manually Declined
Manually Approved
80% Auto Approved
70%
Percentages
60%
50%
40%
30%
20%
10%
0%
<=500
>1000
751-800
801-850
501-550
551-600
601-650
651-700
701-750
851-900
901-950
951-1000
Score Bands
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Group Risk - Retail Risk
Population Stability
■ Compare each characteristic and attribute
– over time
– against benchmarks
■ Plot score distributions over time for potential change
■ Indicates potential drift in performance
NO YES 90%
Population Stability
Dec-96 25% 75% Dec-96
80%
Mar-97 23% 77% Mar-97
Jun-97
Jun-97 24% 76% 70% Sep-97
Dec-97
Sep-97 22% 78% Mar-98
60%
Dec-97 21% 79% Jun-98
Sep-98
Mar-98 19% 81% 50% Dec-98
Mar-99
Jun-98 19% 81% Jun-99
40% Sep-99
Sep-98 22% 78% Dec-99
100% 25%
90%
Delinquency Rates
80% 20%
Approval Rates
70%
60% 15%
50%
40% 10%
30%
20% 5%
10%
0% 0%
1-300 301- 351- 401- 451- 501- 551- 601- 651- 701- 751- >800
350 400 450 500 550 600 650 700 750 800
Score
Even with manual assessment below the cut-off score of 350 the
delinquency rates are higher
Retail Decision Models
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Group Risk - Retail Risk
Scorecard Performance
■ Scorecard performance based on 30+ delinquency
– Good/Bad odds increase as expected by score
Non Delinq
Delinq
Score Distribution & G/B Odds
HL GB Odds
4000 40.0
3500 35.0
3000 30.0
2500 25.0
2000 20.0
1500 15.0
1000 10.0
500 5.0
0 0.0
951-1000
551-600
701-750
851-900
501-550
601-650
651-700
751-800
801-850
901-950
>1000
<=500
Score
Retail Decision Models
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Group Risk - Retail Risk
Presentation Topics
Overview of
Overview of scoring
scoring
ScorecardModelling
Scorecard Modelling
Business Objectives
Business Objectives
WorldBanks
World Banks
Monitoring
Monitoring
FutureDirection
Future Direction
High
cutoffs
low
high
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Group Risk - Retail Risk
Efficient Frontiers in two dimensions
0.6
Low
Cutoffs
0.6
E[Loss] OP
High
Cutoffs OP
E[Profit]
0.0
0.2 E[Volume] 0.9
0.6
Low High Low
Cutoffs Cutoffs Cutoffs
0.2
0.2 E[Volume] 0.9
E[Loss]
OP
Efficient Frontier
High
Cutoffs
0.0 12/01/10 Retail Decision Models
49
0.2 E[Profit] 0.6
Group Risk - Retail Risk
Improved portfolio performance
0.6
Low
Single Score Cutoffs
0.6
E[Loss] OP Combined
Scores
High
Cutoffs OP
Combined
E[Profit]
Scores Single Score
0.0
0.2 E[Volume] 0.9
0.6
Low High Low
Cutoffs
Combined Cutoffs Cutoffs
Scores 0.2
0.2 E[Volume] 0.9
E[Loss]
Single Score
OP
Efficient Frontier
High
Cutoffs
0.0 12/01/10 Retail Decision Models
50
0.2 E[Profit] 0.6
Group Risk - Retail Risk
Best Practices
■ Combining Application & Behavioural scores (Bayesian estimates)
s
t
Reject set with
combined scores
Equal- odds
line ω c (s, t)
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Group Risk - Retail Risk
Other Techniques
■ Customer Relation Management
■ Survival Analysis
■ Multiple Indicator Multiple Cause
Proportional Hazards.ppt
Measuring Customer Quality.doc
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Group Risk - Retail Risk