Rating Models & Guidelines

Guidelines on Credit Risk Management
Rat i ng Model s
and Val i dat i on
These guidelines were prepared by the Oesterreichische Nationalbank (OeNB)

in cooperation with the Financial Market Authority (FMA)
Published by:
Oesterreichische Nationalbank (OeNB)
Otto Wagner Platz 3, 1090 Vienna, Austria
Austrian Financial Market Authority (FMA)
Praterstrasse 23, 1020 Vienna, Austria
Produced by:
Oesterreichische Nationalbank
Editor in chief:
Gunther Thonabauer, Secretariat of the Governing Board and Public Relations (OeNB)
Barbara Nosslinger, Staff Department for Executive Board Affairs and Public Relations (FMA)
Editorial processing:
Doris Datschetzky, Yi-Der Kuo, Alexander Tscherteu, (all OeNB)
Thomas Hudetz, Ursula Hauser-Rethaller (all FMA)
Design:
Peter Buchegger, Secretariat of the Governing Board and Public Relations (OeNB)
Typesetting, printing, and production:
OeNB Printing Office
Published and produced at:
Inquiries:
Secretariat of the Governing Board and Public Relations
Postal address: PO Box 61, 1011 Vienna, Austria
Phone: (+43-1) 40 420-6666
Fax: (+43-1) 404 20-6696
Orders:
Documentation Management and Communication Systems
Postal address: PO Box 61, 1011 Vienna, Austria
Phone: (+43-1) 404 20-2345
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Internet:
http://www.oenb.at
http://www.fma.gv.at
Paper:
Salzer Demeter, 100% woodpulp paper, bleached without chlorine, acid-free, without optical whiteners
DVR 0031577
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Preface
Guidelines on Credit Risk Management 3
I INTRODUCTION
II ESTIMATING AND VALIDATING PROBABILITY
OF DEFAULT (PD)
1 Defining Segments for Credit Assessment
2 Best-Practice Data Requirements for Credit Assessment 11
!1 Govc::uc:ts :c t|c lu|lic ccto: 1!
!! li::cil c:vicc l:ovicc:s 1.
!! o:o:tc ustouc:s l:tc::iscslusi:css w:c:s 1
!+ o:o:tc ustouc:s ccilizcc lc:ci:g !!
2.4.1 Project Finance !+
2.4.2 Object Finance !.
2.4.3 Commodities Finance !o
2.4.4 Income-Producing Real Estate Financing !o
!. kctil ustouc:s !
2.5.1 Mass-Market Banking !
2.5.2 Private Banking !1
3 Commonly Used Credit Assessment Models !!
!1 lcu:istic \occls !!
3.1.1 Classic Rating Questionnaires !!
3.1.2 Qualitative Systems !+
3.1.3 Expert Systems !o
3.1.4 Fuzzy Logic Systems !
!! ttisticl \occls +0
3.2.1 Multivariate Discriminant Analysis +1
3.2.2 Regression Models +!
3.2.3 Artificial Neural Networks +.
!! usl \occls +
3.3.1 Option Pricing Models +
3.3.2 Cash Flow (Simulation) Models +-
!+ l,|:ic lo:us .0
3.4.1 Horizontal Linking of Model Types .1
3.4.2 Vertical Linking of Model Types Using Overrides .!
3.4.3 Upstream Inclusion of Heuristic Knock-Out Criteria .!
4 Assessing the Models Suitability for Various Rating
Segments .+
+1 luliilluc:t oi lssc:til kcqui:cuc:ts .+
4.1.1 PD as Target Value .+
4.1.2 Completeness ..
4.1.3 Objectivity ..
4.1.4 Acceptance .o
4.1.5 Consistency .
+! uit|ilit, oi l:civicul \occl I,cs .
4.2.1 Heuristic Models .
4.2.2 Statistical Models .
4.2.3 Causal Models o0
Contents
4 Guidelines on Credit Risk Management
5 Developing a Rating Model o0
.1 Gc:c:ti:g t|c Dt ct o!
5.1.1 Data Requirements and Sources o!
5.1.2 Data Collection and Cleansing o+
5.1.3 Definition of the Sample !
.! Dcvcloi:g t|c co:i:g lu:ctio: !
5.2.1 Univariate Analyses .
5.2.2 Multivariate Analysis 0
5.2.3 Overall Scoring Function !
.! li|:ti:g t|c kti:g \occl +
5.3.1 Calibration for Logistic Regression .
5.3.2 Calibration in Standard Cases o
.+ I::sitio: \t:iccs
5.4.1 The One-Year Transition Matrix
5.4.2 Multi-Year Transition Matrices -1
6 Validating Rating Models -+
o1 Qulittivc Vlictio: -o
o! Qu:tittivc Vlictio: -
6.2.1 Discriminatory Power -
6.2.2 Back-Testing the Calibration 11.
6.2.3 Back-Testing Transition Matrices 1!!
6.2.4 Stability 1!+
o! lc:c|u:|i:g 1!
o+ t:css Icsts 1!0
6.4.1 Definition and Necessity of Stress Tests 1!0
6.4.2 Essential Factors in Stress Tests 1!1
6.4.3 Developing Stress Tests 1!!
6.4.4 Performing and Evaluating Stress Tests 1!
III ESTIMATING AND VALIDATING LGD/EAD
AS RISK COMPONENTS 1!-
7 Estimating Loss Given Default (LGD) 1!-
1 Dcii:itio: oi loss 1+0
! l:uctc:s io: lGD lcultio: 1+0
7.2.1 LGD-Specific Loss Components in Non-Retail Transactions 1+0
7.2.2 LGD-Specific Loss Components in Retail Transactions 1+!
! lcc:tii,i:g l:io:utio: ::ic:s io: loss l:uctc:s 1++
7.3.1 Information Carriers for Specific Loss Parameters 1++
7.3.2 Customer Types 1+o
7.3.3 Types of Collateral 1+
7.3.4 Types of Transaction 1+-
7.3.5 Linking of Collateral Types and Customer Types 1.0
+ \ct|ocs oi lstiuti:g lGD l:uctc:s 1.1
7.4.1 Top-Down Approaches 1.1
7.4.2 Bottom-Up Approaches 1.!
. Dcvcloi:g : lGD lstiutio: \occl 1.
Contents
8 Estimating Exposure at Default (EAD) 1o!
1 I::sctio: I,cs 1o!
! ustouc: I,cs 1o!
! lAD lstiutio: \ct|ocs 1o.
IV REFERENCES 1o
V FURTHER READING 10
Contents
I INTRODUCTION
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Rating Models and Validation
II ESTIMATING AND VALIDATING
PROBABILITY OF DEFAULT (PD)
1 Defining Segments for Credit Assessment
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Ad 2.
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draft EU directive
1
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to lscl ll :c t|c c:it lD ci:cctivc is ciscusscc
1
EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Article 47, No. 19.
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2 Best-Practice Data Requirements for
Credit Assessment
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Quantitative Data/Information
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:cco:ccc vlucs, cxulcs i:clucc ::ul ii::cil sttcuc:ts, |:| ccou:t
ctivit, ct, o: c:ccit c:c t::sctio:s
lutu:c qu:tittivc ct :cic: to vlucs :o|cctcc o: t|c |sis oi ctul
:uuc:icl vlucs lxulcs oi t|csc ct i:clucc cs| ilow io:ccsts o: |ucgct
clcultio:s
Qualitative Data/Information
I|is t,c is li|cwisc su|civiccc i:to qulittivc ct :cltcc to t|c st:csc:t
o: to t|c iutu:c
lst o: :csc:t qulittivc ct :c su||cctivc cstiutcs io: cc:ti: ct iiclcs
cx:csscc i: o:ci:l ;s ooscc to uct:ic, tc:us I|csc cstiutcs :c |scc o:
|:owlccgc gi:cc i: t|c st lxulcs oi t|csc ct i:clucc sscssuc:ts oi
|usi:css olicics, oi t|c |usi:css ow:c:`s c:so:lit,, o: oi t|c i:cust:, i: w|ic|
|usi:css oc:tcs
lutu:c qulittivc ct :c :o|cctcc vlucs w|ic| c::ot cu::c:tl, |c cx
:csscc i: co:c:ctc iigu:cs lxulcs oi t|csc ct i:clucc |usi:css st:tcgics,
sscssuc:ts oi iutu:c |usi:css ccvclouc:t o: :isls oi |usi:css icc
Wit|i: t|c |:|, ossi|lc sources oi qu:tittivc :c qulittivc ct i:clucc
c:tio:l s,stcus
lI cc:tc:s
\isccll:cous lI lictio:s ;i:cluci:g t|osc uscc locll, t i:civicul
wo:|sttio:s,
lilcs :c :c|ivcs
External Data/Information
l: co:t:st to t|c two ctcgo:ics ciscusscc |ovc, t|is ct t,c :cic:s to i:io:
utio: w|ic| t|c |:| c::ot gt|c: i:tc::ll, o: t|c |sis oi custouc: :cl
tio:s|is |ut w|ic| |s to |c cqui:cc i:ou cxtc::l i:io:utio: :ovicc:s
lossi|lc sou:ccs oi cxtc::l ct i:clucc
lu|lic gc:cics ;cg sttistics oiiiccs,
ouuc:cil ct :ovicc:s ;cg cxtc::l :ti:g gc:cics, c:ccit :co:ti:g
gc:cics,
t|c: ct sou:ccs ;cg i:ccl, vil|lc citl u:|ct i:io:utio:,
cxc|:gc :iccs, o: ot|c: u|lis|cc i:io:utio:,
I|c i:io:utio: ctcgo:ics w|ic| :c gc:c:ll, :clcv:t to :ti:g ccvclo
uc:t :c ccii:cc o: t|c |sis oi t|csc t|:cc ct t,cs lowcvc:, s t|c ct :c
:ot lw,s coulctcl, vil|lc io: ll scguc:ts, :c s t|c, :c :ot cqull, :cl
cv:t to c:ccitwo:t|i:css, t|c :clcv:t ct ctcgo:ics :c icc:tiiicc io: cc|
scguc:t :c s|ow: i: t|c t|lcs |clow
I|csc t|lcs :c :csc:tcc i: succcssio: io: t|c iou: gc:c:l scguc:ts
uc:tio:cc |ovc ;govc::uc:ts :c t|c u|lic sccto:, ii::cil sc:vicc :ovic
c:s, co:o:tc custouc:s, :c :ctil custouc:s,, itc: w|ic| t|c i:civicul ct
ctcgo:ics :c cxli:cc io: cc| su|scguc:t
2.1 Governments and the Public Sector
l: gc:c:l, |:|s co :ot |vc i:tc::l i:io:utio: o: cc:t:l govc::uc:ts, cc:
t:l |:|s, :c :cgio:l govc::uc:ts s |o::owc:s I|c:cio:c, it is :cccss:, to
cxt:ct c:ccitwo:t|i:css:cltcc i:io:utio: i:ou cxtc::l ct sou:ccs l:
co:t:st, t|c vil|ilit, oi ct o: locl ut|o:itics :c u|lic sccto: c:titics
cc:ti:l, llows |:|s to co:sicc: t|cu i:civicull, usi:g i:|ousc ct
Central Governments
c:t:l govc::uc:ts :c su||cctcc to c:ccit sscssuc:t |, cxtc::l :ti:g gc:
cics :c :c t|us ssig:cc cxtc::l cou:t:, :ti:gs As cxtc::l :ti:g gc:cics
|:t ! Dt kcqui:cuc:ts io: Govc::uc:ts :c t|c lu|lic ccto:
c:io:u cou:c|c:sivc :l,scs i: t|is :occss wit| cuc ttc:tio: to t|c cssc:
til icto:s :clcv:t to c:ccitwo:t|i:css, wc c: :cg:c cou:t:, :ti:gs s t|c
:iu:, sou:cc oi i:io:utio: io: c:ccit sscssuc:t I|is cxtc::l c:ccit sscss
uc:t s|oulc |c sulcuc:tcc |, o|sc:vtio:s :c sscssuc:ts oi uc:occo
:ouic i:cicto:s ;cg GDl :c u:culo,uc:t iigu:cs s wcll s |usi:css
c,clcs, io: cc| cou:t:, lxc:ic:cc o: t|c citl u:|cts ovc: t|c lst icw
cccccs |s s|ow: t|t t|c :c,uc:t oi lo:s to govc::uc:ts :c t|c :cccu
tio: oi govc::uc:t |o:cs ccc:c |cvil, o: t|c lcgl :c oliticl st|ilit, oi
t|c cou:t:, i: qucstio: I|c:cio:c, it is lso iuo:t:t to co:sicc: t|c io:u oi
govc::uc:t s wcll s its gc:c:l lcgl :c oliticl situtio: Accitio:l cxtc:
:l ct w|ic| c: |c uscc i:clucc t|c ccvclouc:t oi govc::uc:t |o:c :iccs
:c u|lis|cc citl u:|ct i:io:utio:
Regional Governments
I|is ctcgo:, :cic:s to t|c i:civicul oliticl u:its wit|i: cou:t:, ;cg sttcs,
:ovi:ccs, ctc, kcgio:l govc::uc:ts :c t|ci: :cscctivc iccc:l govc::
uc:ts oitc: |vc closc li|ilit, :cltio:s|i, w|ic| uc:s t|t ii :cgio:l
govc::uc:t is t|:ctc:cc wit| i:solvc:c, t|c iccc:l govc::uc:t will stc i:
to :c, t|c cc|t l: t|is w,, t|c c:ccit qulit, oi t|c iccc:l govc::uc:t lso
l,s sig:iiic:t :olc i: c:ccit sscssuc:ts io: :cgio:l govc::uc:ts, uc:i:g
t|t t|c cou:t:, :ti:g oi t|c govc::uc:t to w|ic| :cgio:l govc::uc:t
|clo:gs is : cssc:til c:itc:io: i: its c:ccit sscssuc:t lowcvc:, w|c: t|c
c:ccitwo:t|i:css oi :cgio:l govc::uc:t is sscsscc, its ow: cxtc::l :ti:g
;ii vil|lc, lso |s to |c t|c: i:to ccou:t A sulcuc:t:, :l,sis oi uc
:occo:ouic i:cicto:s io: t|c :cgio:l govc::uc:t is lso :cccss:, i: t|is co:
tcxt I|c ii::cil :c cco:ouic st:c:gt| oi :cgio:l govc::uc:t c: |c
ucsu:cc o: t|c |sis oi its |ucgct situtio: :c i:i:st:uctu:c As t|c gc:c:l
lcgl :c oliticl ci:cuust:ccs i: :cgio:l govc::uc:t c: souctiucs ciiic:
su|st:till, i:ou t|osc oi t|c cou:t:, to w|ic| it |clo:gs, lc:ci:g i:stitutio:s
s|oulc lso c:io:u sc:tc sscssuc:t i: t|is :c
Local Authorities
I|c i:io:utio: ctcgo:ics :clcv:t to t|c c:ccitwo:t|i:css oi locl ut|o:itics
co :ot civc:gc su|st:till, i:ou t|osc l,i:g to :cgio:l govc::uc:ts low
cvc:, it is c:ti:cl, ossi|lc t|t i:civicul c:itc:i wit|i: t|csc ctcgo:ics will |c
ciiic:c:t io: :cgio:l govc::uc:ts :c locl ut|o:itics cuc to t|c ciiic:c:t
sclcs oi t|ci: cco:ouics
Public Sector Entities
As u|lic sccto: c:titics :c lso :t oi t|c t|c: u|lic gc:cics sccto:, t|ci:
c:ccit sscssuc:t s|oulc lso :cl, o: ct sct siuil: to t|c o:c uscc io:
:cgio:l govc::uc:ts :c locl ut|o:itics lowcvc:, suc| sscssuc:ts s|oulc
lso t|c :, ossi|lc g:ou i:tc:ccc:cc:ccs i:to ccou:t, s suc| :cltio:
s|is u, |vc su|st:til iuct o: t|c :c,uc:t oi lo:s i: t|c lu|lic scc
to: c:titics scguc:t l: souc cscs, ct w|ic| is gc:c:ll, t,icl oi |usi:css
c:tc::iscs will co:ti: :clcv:t i:io:utio: :c s|oulc |c uscc cco:ci:gl,
2.2 Financial Service Providers
l: t|is co:tcxt, financial service providers i:clucc c:ccit i:stitutio:s ;cg |:|s,
|uilci:g :c lo: ssocitio:s, i:vcstuc:t iu:c u:gcuc:t cou:ics,, i:su:
:cc cou:ics :c ii::cil i:stitutio:s ;cg lcsi:g cou:ics, ssct u:gc
uc:t cou:ics,
lo: t|c u:osc oi :ti:g ii::cil sc:vicc :ovicc:s, c:ccit i:stitutio:s will
gc:c:ll, |vc uo:c i:|ousc qu:tittivc :c qulittivc ct t t|ci: cisosl
t|: i: t|c csc oi |o::owc:s i: t|c Govc::uc:ts :c t|c u|lic sccto: scg
uc:t l: o:cc: to gi: coulctc ictu:c oi ii::cil sc:vicc :ovicc:`s c:cc
itwo:t|i:css, |owcvc:, lc:cc:s s|oulc lso i:clucc cxtc::l i:io:utio: i: t|ci:
c:ccit sscssuc:ts
l: :cticc, sc:tc i:|ousc :ti:g uoccls :c ::cl, ccvclocc scciiicll,
io: i:su::cc cou:ics :c ii::cil i:stitutio:s l:stcc, t|c :ti:g uoccls
ccvclocc io: c:ccit i:stitutio:s o: co:o:tc custouc:s c: |c uociiicc :c
culo,cc cco:ci:gl,
Credit institutions
:c cssc:til sou:cc oi qu:tittivc i:io:utio: io: t|c sscssuc:t oi c:ccit
i:stitutio: is its ::ul ii::cil sttcuc:ts lowcvc:, ii::cil sttcuc:ts o:l,
:ovicc i:io:utio: o: t|c o:g:iztio:`s st |usi:css succcss lo: t|c u:osc
oi c:ccit sscssuc:t, |owcvc:, t|c o:g:iztio:`s iutu:c |ilit, :c willi:g:css
to , :c cccisivc icto:s w|ic| uc:s t|t c:ccit sscssuc:ts s|oulc |c su
lcuc:tcc wit| cs| ilow io:ccsts :l, o: t|c |sis oi t|csc io:ccsts is it os
si|lc to cst|lis| w|ct|c: t|c c:ccit i:stitutio: will |c |lc to ucct its iutu:c
,uc:t o|ligtio:s :isi:g i:ou lo:s s| ilow io:ccsts s|oulc |c ccou
:icc |, qulittivc sscssuc:t oi t|c c:ccit i:stitutio:`s iutu:c ccvclouc:t
:c l::i:g I|is will c:|lc t|c lc:ci:g i:stitutio: to :cvicw |ow :clistic
its cs| ilow io:ccsts :c
A:ot|c: cssc:til qulittivc i:io:utio: ctcgo:, is t|c c:ccit i:stitutio:`s
:is| st:uctu:c :c :is| u:gcuc:t l: :ccc:t ,c:s, c:ccit i:stitutio:s |vc
ui:l, cxc:ic:ccc ,uc:t ciiiicultics cuc to cciicic:cics i: :is| u:gcuc:t
I|is is o:c oi t|c ui: :cso:s w|, t|c lscl ll ouuittcc ccciccc to ccvclo
:cw :cgulto:, :cqui:cuc:ts io: t|c t:ctuc:t oi c:ccit :is| l: t|is co:tcxt, it
is lso iuo:t:t to t|c g:ou i:tc:ccc:cc:ccs :c :, :csulti:g li|ilit, o|li
gtio:s i:to ccou:t
l: ccitio: to t|c :is| sicc, |owcvc:, t|c i:couc sicc lso |s to |c cxu
i:cc i: qulittivc tc:us l: t|is co:tcxt, :l,sts s|oulc sscss w|ct|c: t|c
c:ccit i:stitutio:`s scciiic olicics i: cc| |usi:css :c will lso c:|lc t|c
i:stitutio: to stisi, custouc: :cccs :c to gc:c:tc :cvc:uc st:cus i: t|c
iutu:c
li:ll,, lc:cc:s s|oulc lso i:clucc cxtc::l i:io:utio: ;ii vil|lc, i:
t|ci: c:ccit sscssuc:ts i: o:cc: to o|ti: coulctc ictu:c oi c:ccit i:sti
tutio:`s c:ccitwo:t|i:css I|is i:io:utio: u, i:clucc cxtc::l :ti:gs oi t|c
c:ccit i:stitutio:, t|c ccvclouc:t oi its stoc| :icc, o: ot|c: u|lis|cc i:io:
utio: ;cg c |oc :co:ts, I|c :ti:g oi t|c cou:t:, i: w|ic| t|c c:ccit i:sti
tutio: is couicilcc ccsc:vcs sccil co:sicc:tio: i: t|c csc oi c:ccit i:stitu
tio:s io: w|ic| t|c govc::uc:t |s ssuucc li|ilit,
|:t ! Dt kcqui:cuc:ts io: li::cil c:vicc l:ovicc:s
Insurance Companies
Duc to t|ci: ciiic:c:t |usi:css o:ic:ttio:, i:su::cc cou:ics |vc to |c
sscsscc usi:g ciiic:c:t c:ccitwo:t|i:css c:itc:i i:ou t|osc uscc io: c:ccit
i:stitutio:s lowcvc:, t|c cxisti:g siuil:itics |ctwcc: t|csc i:stitutio:s uc:
t|t u:, oi t|c suc i:io:utio: ctcgo:ics lso l, to i:su:c:s
Financial institutions
li::cil i:stitutio:s, o: ot|c: ii::cil sc:vicc :ovicc:s, :c siuil: to c:ccit
i:stitutio:s lowcvc:, t|c scciiic c:ccit sscssuc:t c:itc:i t|c: i:to co:sic
c:tio: u, |c ciiic:c:t io: ii::cil i:stitutio:s lo: cxulc, ssct u:gc
uc:t cou:ics w|ic| o:l, ct s cviso:s :c i:tc:ucci:ics |ut to co :ot
g::t lo:s t|cusclvcs will |vc : c:ti:cl, ciiic:c:t :is| st:uctu:c to t|t oi
c:ccit i:stitutio:s uc| ciiic:c:ccs s|oulc |c t|c: i:to co:sicc:tio: i: t|c
ciiic:c:t c:ccit sscssuc:t :occcu:cs io: t|c su|scguc:ts wit|i: t|c ii::cil
sc:vicc :ovicc:s scguc:t
lowcvc:, it is :ot |solutcl, :cccss:, to ccvclo : c:ti:cl, :cw :ti:g
:occcu:c io: ii::cil i:stitutio:s l:stcc, it u, |c suiiicic:t to usc :
ctcc vc:sio: oi t|c :ti:g uoccl licc to c:ccit i:stitutio:s lt u, lso
|c ossi|lc to sscss cc:ti: ii::cil i:stitutio:s wit| uociiicc co:o:tc cus
touc: :ti:g uoccl, w|ic| woulc c|:gc t|c ct :cqui:cuc:ts cco:ci:gl,
2.3 Corporate Customers Enterprises/Business Owners
I|c gc:c:l scguc:t o:o:tc ustouc:s l:tc::iscslusi:css w:c:s
c: |c su|civiccc i:to t|c iollowi:g su|scguc:ts
itl u:|cto:ic:tcc
!
i:tc::tio:l cou:ics
t|c: cou:ics w|ic| :c:c |l:cc s|ccts
lusi:csscs :c i:ccc:cc:t :oicssio:ls ;:ot :c:i:g |l:cc s|ccts,
ull |usi:csscs
t:tus
:ls ;:o::oiit o:g:iztio:s,
I|c ii:st iou: su|scguc:ts co:sist oi c:tc::iscs w|ic| |vc l:cc, |cc: o:
t|c u:|ct io: souc tiuc I|csc c:tc::iscs ciiic: i: sizc :c t|us lso i: tc:us
oi t|c vil|lc ct ctcgo:ics
l: t|c csc oi st:tus, t|c i:io:utio: vil|lc will |c vc:, ccc:ci:g o:
t|c c:tc::isc`s cu::c:t stgc oi ccvclouc:t :c s|oulc |c t|c: i:to ccou:t
cco:ci:gl,
I|c ui: ciiic:c:titi:g c:itc:io: i: t|c csc oi :ls is t|c ict t|t t|c,
:c :ot oc:tcc io: t|c u:osc oi u|i:g :oiit
\o:covc:, it is couuo: :cticc i: t|c co:o:tc scguc:t to ccvclo sc
:tc :ti:g uoccls io: v:ious cou:t:ics :c :cgio:s ;cg io: c:tc::iscs i:
ll cou:t:ics, Auo:g ot|c: t|i:gs, t|csc uoccls t|c t|c ccou:ti:g st:c
:cs lic|lc i: i:civicul cou:t:ics i:to co:sicc:tio:
2
Capital market-oriented means that the company funds itself (at least in part) by means of capital market instruments (stocks,
bonds, securitization).
|:t + Dt kcqui:cuc:ts io: o:o:tc ustouc:s l:tc::iscslusi:css w:c:s
Capital Market-Oriented/International Companies
I|c ui: sou:cc oi c:ccit sscssuc:t ct o: citl u:|cto:ic:tcci:tc::
tio:l cou:ics is t|ci: ::ul ii::cil sttcuc:ts lowcvc:, ii::cil sttc
uc:t :l,scs :c |scc solcl, o: t|c st :c t|c:cio:c c::ot iull, ccict
cou:,`s |ilit, to ucct iutu:c ,uc:t o|ligtio:s Io sulcuc:t t|csc
:l,scs, cs| ilow io:ccsts c: lso |c i:cluccc i: t|c sscssuc:t :occss I|is
:cqui:cs qulittivc sscssuc:t oi t|c cou:,`s iutu:c ccvclouc:t :c l:
:i:g i: o:cc: to sscss |ow :clistic t|csc cs| ilow io:ccsts :c
Accitio:l qulittivc i:io:utio: to |c sscsscc i:cluccs t|c u:gcuc:t,
t|c cou:,`s o:ic:ttio: tow:c scciiic custouc:s :c :ocucts i: i:civicul
|usi:css :cs, :c t|c i:cust:, i: w|ic| t|c cou:, oc:tcs I|c co:c o||cc
tivc oi :l,zi:g t|csc i:io:utio: ctcgo:ics s|oulc lw,s |c : :isl oi :
c:tc::isc`s |ilit, to ucct its iutu:c ,uc:t o|ligtio:s As citl u:|ct
o:ic:tcci:tc::tio:l cou:ics :c oitc: |:oc, coulcx g:ous oi cou
:ics, lcgl issucs csccill, t|osc :cltcc to li|ilit, s|oulc |c cxui:cc
c:ciull, i: t|c :c oi qulittivc i:io:utio:
:c cssc:til ciiic:c:cc |ctwcc: citl u:|cto:ic:tcci:tc::tio:l
cou:ics :c ot|c: t,cs oi c:tc::iscs is t|c vil|ilit, oi cxtc::l i:io:u
tio: I|c citl u:|ct i:io:utio: vil|lc u, i:clucc t|c stoc| :icc :c
its ccvclouc:t ;io: cxc|:gclistcc cou:ics,, ot|c: u|lis|cc i:io:utio:
;cg c |oc :co:ts,, :c cxtc::l :ti:gs
Other enterprises which prepare balance sheets
(not capital market-oriented/international)
:ccit sscssuc:t io: ot|c: cou:ics w|ic| :c:c |l:cc s|ccts is l:gcl,
siuil: to t|c sscssuc:t oi citl u:|cto:ic:tcci:tc::tio:l cou:ics
lowcvc:, t|c:c :c souc ciiic:c:ccs i: t|c vil|lc i:io:utio: :c t|c iocuscs
oi sscssuc:t
l: t|is co:tcxt, :l,scs lso iocus o: t|c cou:,`s ::ul ii::cil sttc
uc:ts l: co:t:st to t|c sscssuc:t oi citl u:|cto:ic:tcci:tc::tio:l
cou:ics, |owcvc:, t|csc :l,scs :c :ot gc:c:ll, sulcuc:tcc wit| cs|
ilowio:ccsts, |ut usull, wit| : :l,sis oi t|c |o::owc:`s cc|t sc:vicc ccit,
I|is :l,sis givcs siuliiicc :csc:ttio: oi w|ct|c: t|c |o::owc: c: ucct t|c
iutu:c ,uc:t o|ligtio:s :isi:g i:ou lo: o: t|c |sis oi i:couc :c cxc:scs
cxcctcc i: t|c iutu:c l: t|is co:tcxt, t|c:cio:c, it is lso :cccss:, to sscss t|c
cou:,`s iutu:c ccvclouc:t :c l::i:g i: qulittivc tc:us
l: ccitio:, |:| ccou:t ctivit, ct c: lso :ovicc sou:cc oi qu:ti
ttivc i:io:utio: I|is uig|t i:clucc t|c :l,sis oi lo:gtc:u ovc:c:its s
wcll s cc|it o: c:ccit |l:ccs I|is t,c oi :l,sis is :ot icsi|lc io: citl
u:|cto:ic:tcci:tc::tio:l cou:ics cuc to t|ci: l:gc :uu|c: oi |:|
ccou:ts, w|ic| :c gc:c:ll, cist:i|utcc uo:g uultilc ;:tio:l :c i:tc:
:tio:l, c:ccit i:stitutio:s
: t|c qulittivc lcvcl, t|c u:gcuc:t :c t|c :cscctivc i:cust:, oi
t|csc cou:ics lso |vc to |c sscsscc As t|c o:g:iztio:l st:uctu:c oi
t|csc cou:ics is su|st:till, lcss coulcx t|: t|t oi citl u:|cto:i
c:tcci:tc::tio:l cou:ics, t|c o:ic:ttio: oi |usi:css :cs is lcss iuo:
t:t i: t|is co:tcxt kt|c:, t|c succcss oi cou:, w|ic| :c:cs |l:cc
s|ccts |i:gcs o: its st:c:gt| :c :csc:cc o: t|c :clcv:t u:|ct I|is uc:s
t|t it is :cccss:, to :l,zc w|ct|c: t|c cou:,`s o:ic:ttio: i: tc:us oi
custouc:s :c :ocucts lso i:cictcs iutu:c succcss o: its scciiic u:|ct
l: i:civicul cscs, cxtc::l :ti:gs c: lso |c uscc s : ccitio:l sou:cc
oi i:io:utio: li suc| :ti:gs :c :ot vil|lc, c:ccit :co:ti:g i:io:utio: o:
cou:ics w|ic| :c:c |l:cc s|ccts is gc:c:ll, lso vil|lc i:ou i:cc
c:cc:t c:ccit :co:ti:g gc:cics
Businesses and Independent Professionals
(not preparing balance sheets)
I|c ui: ciiic:c:cc |ctwcc: t|is su|scguc:t :c t|c c:tc::isc t,cs cis
cusscc i: t|c :cvious scctio:s is t|c ict t|t t|c ::ul ii::cil sttcuc:ts
uc:tio:cc |ovc :c :ot vil|lc I|c:cio:c, lc:cc:s s|oulc usc ot|c: sou:ccs
oi qu:tittivc ct suc| s i:couc :c cxc:sc ccou:ts i: o:cc: to c:su:c
s o||cctivc c:ccit sscssuc:t s ossi|lc I|csc ccou:ts :c :ot st:c:cizcc
to t|c cxtc:t t|t ::ul ii::cil sttcuc:ts :c, |ut t|c, c: ,iclc :cli|lc
i:cicto:s oi c:ccitwo:t|i:css
Duc to t|c c:so:l li|ilit, oi |usi:css ow:c:s, it is oitc: ciiiicult to
sc:tc t|ci: :oicssio:l :c :ivtc ctivitics clc:l, i: t|is scguc:t I|c:c
io:c, it is lso cvis|lc to :cqucst i:io:utio: o: sscts :c li|ilitics s wcll s
tx :ctu::s :c i:couc tx sscssuc:ts :oviccc |, t|c |usi:css ow:c:s t|cu
sclvcs
l:io:utio: cc:ivcc i:ou |:| ccou:t ctivit, ct c: lso sc:vc s cou
lcuc:t to t|c qu:tittivc :l,sis oi ct i:ou t|c st
l: t|is scguc:t, ct :cltcc to t|c st lso |vc to |c ccou:icc |,
io:w:cloo|i:g :l,sis oi t|c |o::owc:`s cc|t sc:vicc ccit,
: t|c qulittivc lcvcl, it is :cccss:, to sscss t|c suc ct ctcgo:ics s
i: t|c csc oi cou:ics w|ic| :c:c |l:cc s|ccts ;u:|ct, i:cust:,, ctc,
lowcvc:, t|c succcss oi |usi:css ow:c: o: i:ccc:cc:t :oicssio:l ccc:cs
i: uo:c o: |is|c: c:so:l c|:ctc:istics t|: o: t|c u:gcuc:t oi cou
lcx o:g:iztio: I|c:cio:c, sscssuc:t iocuscs o: t|c c:so:l c|:ctc:istics
oi t|c |usi:css ow:c:s :ot t|c u:gcuc:t oi t|c o:g:iztio: i: t|c csc oi
t|csc |usi:csscs :c i:ccc:cc:t :oicssio:ls As :cg:cs cxtc::l ct, it is
cvis|lc to o|ti: c:ccit :co:ti:g i:io:utio: ;cg i:ou t|c co:suuc: lo:s
:cgistc:, o: t|c |usi:css ow:c: o: i:ccc:cc:t :oicssio:l
Small Businesses
l: souc cscs, it is sc:si|lc to usc sc:tc :ti:g :occcu:c io: sull |usi
:csscs ou:cc to ot|c: |usi:csscs w|ic| co :ot :c:c |l:cc s|ccts,
t|csc |usi:csscs :c ui:l, c|:ctc:izcc |, t|c sullc: sclc oi t|ci: |usi:css
ctivitics :c t|c:cio:c |, lowc: citl :cccs l: :cticc, :l,sts oitc: l,
siuliiicc c:ccit sscssuc:t :occcu:cs to sull |usi:csscs, t|c:c|, :ccuci:g
t|c ct :cqui:cuc:ts :c t|us lso t|c :occss costs i:volvcc
I|c :csulti:g siuliiictio:s cou:cc to t|c :cvious scguc:t ;|usi:css
ow:c:s :c i:ccc:cc:t :oicssio:ls w|o co :ot :c:c |l:cc s|ccts,
:c s iollows
l:couc :c cxc:sc ccou:ts :c :ot cvlutcc
I|c :l,sis oi t|c |o::owc:`s cc|t sc:vicc ccit, is :clccc wit| siu
liiicc |ucgct clcultio:
\:|ct :osccts :c :ot sscsscc cuc to t|c sullc: sclc oi |usi:css ctiv
itics
Asicc i:ou t|csc siuliiictio:s, t|c :occcu:c licc is :logous to t|c
o:c uscc io: |usi:css ow:c:s :c i:ccc:cc:t :oicssio:ls w|o co :ot :c:c
|l:cc s|ccts
Start-Ups
l: :cticc, sc:tc :ti:g uoccls :c :ot oitc: ccvclocc io: st:tus l:stcc,
t|c, ct t|c cxisti:g uoccls uscc io: co:o:tc custouc:s I|csc cttio:s
uig|t i:volvc t|c i:clusio: oi qulittivc st:tu c:itc:io: w|ic| ccs
;usull, |cu:isticll, ccii:cc, :cgtivc i:ut to t|c :ti:g uoccl lt is lso os
si|lc to i:clucc ot|c: soit icts o: to liuit t|c uxiuuu :ti:g clss tti:cc i:
t|is scguc:t
li sc:tc :ti:g uoccl is ccvclocc io: t|c st:tu scguc:t, it is :cc
css:, to cisti:guis| |ctwcc: t|c :clu:c| :c ostlu:c| stgcs, s ciiic:c:t
i:io:utio: will |c vil|lc cu:i:g t|csc two |scs
Pre-Launch Stage
As qu:tittivc ct o: st:tus ;cg |l:cc s|cct :c :oiit :c loss ccou:ts,
:c :ot ,ct vil|lc i: t|c :clu:c| stgc, it is :cccss:, to :cl, o: ot|c:
ui:l, qulittivc ct ctcgo:ics
I|c cccisivc icto:s i: t|c iutu:c succcss oi st:tu :c t|c |usi:css icc
:c its :cliztio: i: |usi:css l: Acco:ci:gl,, sscssuc:t i: t|is co:tcxt
iocuscs o: t|c |usi:css icc`s :osccts oi succcss :c t|c icsi|ilit, oi t|c |usi
:css l: I|is lso i:volvcs qulittivc sscssuc:t oi u:|ct oo:tu:itics s
wcll s :cvicw oi t|c :osccts oi t|c i:cust:, i: w|ic| t|c st:tu iou:cc:
l:s to oc:tc l:cticl cxc:ic:cc |s s|ow: t|t st:tu`s :osccts oi
succcss :c |cvil, ccc:cc:t o: t|c c:so:l c|:ctc:istics oi t|c |usi:css
ow:c: l: o:cc: to o|ti: coulctc ictu:c oi t|c |usi:css ow:c:`s c:so:l
c|:ctc:istics, c:ccit :co:ti:g i:io:utio: ;cg i:ou t|c co:suuc: lo:s :cg
istc:, s|oulc lso |c :ct:icvcc
: t|c qu:tittivc lcvcl, t|c ii::ci:g st:uctu:c oi t|c st:tu :o|cct
s|oulc |c cvlutcc I|is i:cluccs : :l,sis oi t|c cquit, co:t:i|utcc, otc:
til g::t iu:ci:g :c t|c :csulti:g :csicul ii::ci:g :cccs l: ccitio:, : :l
,sis oi t|c o:g:iztio:`s cc|t sc:vicc ccit, s|oulc |c c:io:ucc i: o:cc: to
sscss w|ct|c: t|c st:tu will |c |lc to ucct iutu:c ,uc:t o|ligtio:s o:
t|c |sis oi cxcctcc i:couc :c cxc:scs
Post-Launch Stage
As uo:c ct o: t|c :cwl, cst|lis|cc c:tc::isc :c vil|lc i: t|c ostlu:c|
stgc, c:ccit sscssuc:ts s|oulc lso i:clucc t|is i:io:utio:
l: ccitio: to t|c ct :cqui:cuc:ts ccsc:i|cc io: t|c :clu:c| stgc, it is
:cccss:, to :l,zc t|c iollowi:g ct ctcgo:ics
A::ul ii::cil sttcuc:ts o: i:couc :c cxc:sc ccou:ts ;s vil|lc,
l:| ccou:t ctivit, ct
liquicit, :c :cvc:uc ccvclouc:t
lutu:c l::i:g :c cou:, ccvclouc:t
I|is will u|c it ossi|lc to cvlutc t|c st:tu`s |usi:css succcss to ctc
o: t|c |sis oi qu:tittivc ct :c to cou:c t|is i:io:utio: wit| t|c |usi
:css l: :c iutu:c l::i:g i:io:utio:, t|us :ovici:g uo:c coulctc ic
tu:c oi t|c st:tu`s c:ccitwo:t|i:css
NPOs (Non-Profit Organizations)
Alt|oug| :ls co :ot oc:tc io: t|c u:osc oi u|i:g :oiit, it is still :cc
css:, to :cvicw t|c cco:ouic susti:|ilit, oi t|csc o:g:iztio:s |, :l,zi:g
t|ci: ::ul ii::cil sttcuc:ts l: cou:iso: to t|osc oi co:vc:tio:l :oiit
o:ic:tcc cou:ics, t|c i:civicul |l:cc s|cct i:cicto:s oi :ls |vc to |c
i:tc::ctcc ciiic:c:tl, lowcvc:, t|csc i:cicto:s still c:|lc :cli|lc sttcuc:ts
s to t|c o:g:iztio:`s cco:ouic ciiicic:c, l: o:cc: to llow io:w:cloo|i:g
sscssuc:ts oi w|ct|c: t|c o:g:iztio: will |c |lc to ucct its ,uc:t o|li
gtio:s, it is lso :cccss:, to :l,zc t|c o:g:iztio:`s cc|t sc:vicc ccit,
I|is cc|t sc:vicc ccit, :l,sis is to |c :cvicwcc i: c:iticl lig|t |, sscssi:g
t|c o:g:iztio:`s l::i:g :c iutu:c ccvclouc:t lt is lso iuo:t:t to :
l,zc |:| ccou:t ctivit, ct i: o:cc: to cctcct ,uc:t cis:utio:s t :
c:l, stgc I|c vi|ilit, oi : :l lso ccc:cs o: qulittivc icto:s suc|
s its u:gcuc:t :c t|c :osccts oi t|c i:cust:,
As cxtc::l i:io:utio:, t|c gc:c:l lcgl :c oliticl ci:cuust:ccs i:
w|ic| t|c :l oc:tcs s|oulc |c t|c: i:to ccou:t, s :ls :c oitc:
ccc:cc:t o: cu::c:t lcgisltio: :c govc::uc:t g::ts ;cg i: o:g:iztio:s
iu:ccc |, co:tio:s,
2.4 Corporate Customers Specialized Lending
ccilizcc lc:ci:g oc:tio:s c: |c c|:ctc:izcc s iollows
!
The exposure is typically to an entity (often a special purpose entity (SPE)) which
was created specifically to finance and/or operate physical assets;
The borrowing entity has little or no other material assets or activities, and there-
fore little or no independent capacity to repay the obligation, apart from the
income that it receives from the asset(s) being financed;
The terms of the obligation give the lender a substantial degree of control over the
asset(s) and the income that it generates; and
As a result of the preceding factors, the primary source of repayment of the obli-
gation is the income generated by the asset(s), rather than the independent
capacity of a broader commercial enterprise.
: t|c |sis oi t|c c|:ctc:istics uc:tio:cc |ovc, sccilizcc lc:ci:g
oc:tio:s |vc to |c sscsscc ciiic:c:tl, i:ou co:vc:tio:l cou:ics :c
:c t|c:cio:c su||cct to ciiic:c:t ct :cqui:cuc:ts l: co:t:st to t|t oi
co:vc:tio:l cou:ics, c:ccit sscssuc:t i: t|is co:tcxt iocuscs :ot o: t|c
|o::owc: |ut o: t|c sscts ii::ccc :c t|c cs| ilows cxcctcc i:ou t|osc
sscts
3
Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Article 47, No. 8.
|:t . Dt kcqui:cuc:ts io: o:o:tc ustouc:s ccilizcc lc:ci:g
l: gc:c:l, iou: ciiic:c:t t,cs oi sccilizcc lc:ci:g c: |c cisti:guis|cc o:
t|c |sis oi t|c sscts ii::ccc
+
l:o|cct ii::cc
||cct ii::cc
ouuocitics ii::cc
li::ci:g oi i:couc:ocuci:g :cl csttc
lo: :o|cct ii::cc, o||cct ii::cc :c t|c ii::ci:g oi i:couc:ocuci:g
:cl csttc, ciiic:c:t ct will |c vil|lc io: c:ccit sscssuc:t u:oscs
ccc:ci:g o: t|c stgc to w|ic| t|c :o|cct |s :og:csscc lo: t|csc t|:cc
t,cs oi sccilizcc lc:ci:g oc:tio:s, it is :cccss:, to ciiic:c:titc |ctwcc:
c:ccit sscssuc:t |cio:c :c cu:i:g t|c :o|cct l: couuocitics ii::cc, t|is
ciiic:c:titio: oi stgcs is :ot :cccss:, s t|csc t::sctio:s gc:c:ll, i:volvc
o:l, s|o:ttc:u lo:s
2.4.1 Project Finance
I|is t,c oi ii::ci:g is gc:c:ll, uscc io: l:gc, coulcx :c cxc:sivc :o|
ccts suc| s owc: l:ts, c|cuicl icto:ics, ui:i:g :o|ccts, t::so:t i:i:
st:uctu:c :o|ccts, c:vi:o:uc:tl :otcctio: ucsu:cs :c tclccouuu:ictio:s
:o|ccts I|c lo: is :cic cxclusivcl, ;o: luost cxclusivcl,, usi:g t|c :o
ccccs oi co:t:cts sig:cc io: t|c icilit,`s :ocucts I|c:cio:c, :c,uc:t
cssc:till, ccc:cs o: t|c :o|cct`s cs| ilows :c t|c colltc:l vluc oi :o|cct
sscts
.
Before the Project
: t|c |sis oi t|c ccc:cc:ccs ccsc:i|cc |ovc, it is :cccss:, to sscss t|c
cxcctcc cs| ilow gc:c:tcc |, t|c :o|cct i: o:cc: to cstiutc t|c :o||ilit,
oi :c,uc:t io: t|c lo: I|is :cqui:cs cctilcc :l,sis oi t|c |usi:css l:
u:cc:l,i:g t|c :o|cct l: :ticul:, it is :cccss:, to sscss t|c cxtc:t to w|ic|
t|c iigu:cs :csc:tcc i: t|c l: c: |c co:sicc:cc :clistic I|is :l,sis c: |c
sulcuc:tcc |, c:ccit i:stitutio:`s ow: cs| ilow io:ccsts I|is is couuo:
:cticc i: :cl csttc ii::cc t::sctio:s, io: cxulc, i: w|ic| t|c |:| c:
cstiutc cxcctcc cs| ilows quitc ccu:tcl, i:|ousc
l: t|is scguc:t, t|c lc:cc: uust cou:c t|c cxcctcc cs| ilow to t|c
:o|cct`s ii::ci:g :cqui:cuc:ts, wit| cuc ttc:tio: to cquit, co:t:i|utio:s
:c g::t iu:ci:g I|is will s|ow w|ct|c: t|c |o::owc: is li|cl, to |c i: osi
tio: to ucct iutu:c ,uc:t o|ligtio:s I|c :is| i:volvcc i: :o|cct ii::cc
lso ccc:cs |cvil, o: t|c scciiic t,c oi :o|cct i:volvcc li t|c l::cc :o|
cct cocs :ot ucct t|c :cccs oi t|c :cscctivc u:|ct ;cg t|c co:st:uctio: oi
c|cuicl icto:, cu:i:g c:isis i: t|c i:cust:,,, t|is u, cusc :c,uc:t :o|
lcus ltc:
|oulc ,uc:t ciiiicultics :isc, t|c colltc:l vluc oi :o|cct sscts :c
t|c cstiutcc :csulti:g slc :occccs will |c cccisivc io: t|c c:ccit i:stitutio:
lcsiccs :o|cctscciiic i:io:utio:, ct o: t|c |o::owc:s lso |vc to |c
:l,zcc I|is i:cluccs t|c ow:c:s|i st:uctu:c s wcll s t|c :cscctivc c:ccit
st:ci:g oi cc| st|c|olcc: i: t|c :o|cct Dcc:ci:g o: t|c scciiic li|ilit,
4
5
Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Annex D-1, No. 8.
:cltio:s|is i: t|c :o|cct, t|csc c:ccit :ti:gs will iicct t|c sscssuc:t oi t|c
:o|cct ii::cc t::sctio: i: v:ious w,s
:c cxtc::l icto: w|ic| ccsc:vcs ttc:tio: is t|c cou:t:, i: w|ic| t|c
:o|cct is to |c c::icc out D:st|lc lcgl :c oliticl ci:cuust:ccs c: cusc
:o|cct ccl,s :c c: t|us :csult i: ,uc:t ciiiicultics ou:t:, :ti:gs c: |c
uscc s i:cicto:s io: sscssi:g scciiic cou:t:ics
During the Project
l: ccitio: to t|c i:io:utio: vil|lc t t|c |cgi::i:g oi t|c :o|cct, cci
tio:l ct ctcgo:ics c: |c sscsscc cu:i:g t|c :o|cct cuc to iu:ovcc ct
vil|ilit, At t|is stgc, it is lso ossi|lc to cou:c t:gct iigu:cs wit| ctul
ct uc| cou:iso:s c: ii:st |c c:io:ucc io: t|c gc:c:l :og:css oi t|c
:o|cct |, c|cc|i:g t|c cu::c:t :o|cct sttus gi:st t|c sttus sc|cculcc i: t|c
|usi:css l: I|c :csults will :cvcl :, otc:til c:gc:s to t|c :og:css oi t|c
:o|cct
cco:c, sscssuc:t u, lso i:volvc cou:i:g cs| ilow io:ccsts wit| t|c
cs| ilows :clizcc to ctc li l:gc ccvitio:s :isc, t|is |s to |c t|c: i:to
ccou:t i: c:ccit sscssuc:t
A:ot|c: qulittivc icto: to |c sscsscc is t|c iuliilluc:t oi scciiic covc
::ts o: :cqui:cuc:ts, suc| s co:st:uctio: :cqui:cuc:ts, c:vi:o:uc:tl :o
tcctio: :cqui:cuc:ts :c t|c li|c lilu:c to iuliill t|csc :cqui:cuc:ts c: ccl,
o: cvc: c:c:gc: t|c :o|cct
2.4.2 Object Finance
Object finance (OF) refers to a method of funding the acquisition of physical assets
(e.g. ships, aircraft, satellites, railcars, and fleets) where the repayment of the expo-
sure is dependent on the cash flows generated by the specific assets that have been
financed and pledged or assigned to the lender.
o
kc:tl o: lcsi:g g:ccuc:ts wit|
o:c o: uo:c co:t:ct :t:c:s c: |c :iu:, sou:cc oi t|csc cs| ilows
Before the Project
l: t|is co:tcxt, t|c :occcu:c to |c licc is :logous to t|c o:c uscc io:
:o|cct ii::cc, t|t is, :l,sis s|oulc iocus o: cxcctcc cs| ilow :c siuul
t:cous sscssuc:t oi t|c |usi:css l: lxcctcc cs| ilow is to |c cou:cc
to ii::ci:g :cqui:cuc:ts wit| cuc ttc:tio: to cquit, co:t:i|utio:s :c g::t
iu:ci:g
I|c t,c oi sscts ii::ccc c: sc:vc s : i:cicto: oi t|c gc:c:l :is|
i:volvcc i: t|c o||cct ii::cc t::sctio: |oulc ,uc:t ciiiicultics :isc,
t|c colltc:l vluc oi t|c sscts ii::ccc :c t|c cstiutcc :csulti:g slc :o
ccccs will |c cccisivc icto:s io: t|c c:ccit i:stitutio:
l: ccitio: to o||cctscciiic ct, it is lso iuo:t:t to :cvicw t|c c:cc
itwo:t|i:css oi t|c :tics i:volvcc ;cg |, uc:s oi cxtc::l :ti:gs, :c
cxtc::l icto: to |c t|c: i:to ccou:t is t|c cou:t:, i: w|ic| t|c o||cct is
to |c co:st:uctcc D:st|lc lcgl :c oliticl ci:cuust:ccs c: cusc :o|cct
ccl,s :c c: t|us :csult i: ,uc:t ciiiicultics I|c :clcv:t cou:t:, :ti:g
c: sc:vc s : ccitio:l i:cicto: i: t|c sscssuc:t oi scciiic cou:t:,
6
Alt|oug| t|c ct ctcgo:ics io: :o|cct :c o||cct ii::cc t::sctio:s :c
icc:ticl, t|c cvlutio: c:itc:i c: still ciiic: i: scciiic ct ctcgo:ics
During the Project
l: ccitio: to t|c i:io:utio: vil|lc t t|c |cgi::i:g oi t|c :o|cct, it is os
si|lc to sscss ccitio:l ct ctcgo:ics cu:i:g t|c :o|cct cuc to iu:ovcc ct
vil|ilit, I|c :occcu:c to |c licc |c:c is :logous to t|c o:c uscc io:
:o|cct ii::cc t::sctio:s ;cu:i:g t|c :o|cct,, w|ic| uc:s t|t t|c cssc:til
:cw c:ccit sscssuc:t :cs :c s iollows
I:gctctul cou:iso: oi cs| ilows
I:gctctul cou:iso: oi co:st:uctio: :og:css
luliilluc:t oi :cqui:cuc:ts
2.4.3 Commodities Finance
Commodities finance refers to structured short-term lending to finance reserves,
inventories or receivables of exchange-traded commodities (e.g. crude oil, metals,
or grains), where the exposure will be repaid from the proceeds of the sale of the com-
modity and the borrower has no independent capacity to repay the exposure
Duc to t|c s|o:ttc:u :tu:c oi t|c lo:s ;s uc:tio:cc |ovc,, it is :ot

:cccss:, to cisti:guis| v:ious :o|cct stgcs i: couuocitics ii::cc
:c cssc:til c|:ctc:istic oi couuocitics ii::cc t::sctio: is t|c ict
t|t t|c :occccs i:ou t|c slc oi t|c couuocit, :c uscc to :c, t|c lo:
I|c:cio:c, t|c :iu:, i:io:utio: to |c t|c: i:to ccou:t is :cltcc to t|c
couuocit, itscli li ossi|lc, c:ccit sscssuc:ts s|oulc lso i:clucc t|c cu::c:t
cxc|:gc :icc oi t|c couuocit, s wcll s |isto:icl :c cxcctcc :icc ccvcl
ouc:ts I|c cxcctcc :icc ccvclouc:t c: |c uscc to cc:ivc t|c cxcctcc
slc :occccs s t|c colltc:l vluc l, co:t:st, t|c c:ccitwo:t|i:css oi t|c
:tics i:volvcc l,s lcss iuo:t:t :olc i: couuocitics ii::cc
lxtc::l icto:s w|ic| s|oulc :ot |c :cglcctcc i: t|c :ti:g :occss i:clucc
t|c lcgl :c oliticl ci:cuust:ccs t t|c lcc oi iuliilluc:t io: t|c couuoc
itics ii::cc t::sctio: A lc| oi cl:it, i: t|c lcgl situtio: t t|c lcc oi
iuliilluc:t coulc cusc :o|lcus wit| t|c slc :c t|us ,uc:t ciiiicultics
I|c cou:t:, :ti:g c: lso sc:vc s : i:cicto: i: t|c sscssuc:t oi scciiic
cou:t:ics
2.4.4 Income-Producing Real Estate Financing
The term Income-producing real estate (IPRE) refers to a method of providing fund-
ing to real estate (such as, office buildings to let, retail space, multifamily residential
buildings, industrial or warehouse space, and hotels) where the prospects for repay-
ment and recovery on the exposure depend primarily on the cash flows generated by
the asset.
I|c ui: sou:cc oi t|csc cs| ilows is :c:tl :c lcsi:g i:couc o:

t|c slc oi t|c ssct
7
8
Before the Project
As t|c :c,uc:t oi t|c lo: ui:l, ccc:cs o: t|c i:couc gc:c:tcc |, t|c
:cl csttc, t|c ui: ct ctcgo:, uscc i: c:ccit sscssuc:t is t|c cs| ilow
io:ccst io: :occccs i:ou :c:tls :co: slcs l: o:cc: to sscss w|ct|c: t|is
cs| ilow io:ccst is :clistic, it is iuo:t:t to sscss t|c :c:t lcvcls oi cou
:|lc :oc:tics t t|c :cscctivc loctio: s wcll s t|c ii: u:|ct vluc oi t|c
:cl csttc lo: t|is u:osc, |isto:icl tiuc sc:ics s|oulc |c o|sc:vcc i: :
ticul: i: o:cc: to cc:ivc cstiutcs oi iutu:c ccvclouc:ts i: :c:t lcvcls :c
:cl csttc :iccs I|csc cxcctcc ccvclouc:ts c: |c uscc to cc:ivc t|c
cxcctcc slc :occccs s t|c colltc:l vluc i: t|c csc oi cciult I|c lc:cc:
s|oulc cou:c lusi|lc cs| ilow io:ccst wit| t|c ii::ci:g st:uctu:c oi t|c
t::sctio: i: o:cc: to sscss w|ct|c: t|c |o::owc: will |c |lc to ucct iutu:c
,uc:t o|ligtio:s
lu:t|c:uo:c, it is :cccss:, to co:sicc: t|c t,c oi :oc:t, ii::ccc :c
w|ct|c: it is gc:c:ll, ossi|lc to :c:t out o: scll suc| :oc:tics o: t|c cu::c:t
u:|ct
lvc: ii t|c |o::owc:`s c:ccitwo:t|i:css is :ot co:sicc:cc c:ucil i: cou
uc:cil :cl csttc ii::ci:g t::sctio:, it is lso :cccss:, to cxui:c t|c ow:
c:s|i st:uctu:c :c t|c c:ccit st:ci:g oi cc| st|c|olcc: i:volvcc I|c iutu:c
i:couc :ocuccc |, t|c :cl csttc ccc:cs |cvil, o: t|c c:ccitwo:t|i:css oi
t|c iutu:c tc::t o: lcsscc, :c t|c:cio:c c:ccit sscssuc:ts io: t|c :cl csttc
ii::ci:g t::sctio: s|oulc lso i:clucc t|is i:io:utio: w|c:cvc: ossi|lc
A:ot|c: cxtc::l icto: w|ic| l,s : iuo:t:t :olc i: c:ccit sscssuc:t
is t|c cou:t:, i: w|ic| t|c :cl csttc :o|cct is to |c co:st:uctcc lt is o:l,
ossi|lc to c:su:c tiucl, coulctio: oi t|c :o|cct u:cc: st|lc gc:c:l lcgl
:c oliticl co:citio:s I|c cxtc::l cou:t:, :ti:g c: sc:vc s ucsu:c
oi cou:t:,`s st|ilit,
During the Project
Asicc i:ou t|c i:io:utio: vil|lc t t|c |cgi::i:g oi t|c :o|cct, :uu|c:
oi ccitio:l ct ctcgo:ics c: |c sscsscc cu:i:g t|c :o|cct I|csc i:clucc
t|c iollowi:g
I:gctctul cou:iso: oi co:st:uctio: :og:css
I:gctctul cou:iso: oi cs| ilows
luliilluc:t oi covc::ts:cqui:cuc:ts
ccu:c, :tc
Wit| t|c |cl oi t:gctctul cou:iso:s, t|c :o|cct`s co:st:uctio:
:og:css c: |c c|cc|cc gi:st its l::cc sttus l: t|is co:tcxt, su|st:til
ccvitio:s c: sc:vc s c:l, sig:s oi c:gc: i: t|c :cl csttc :o|cct
cco:c, t|c sscssuc:t c: lso i:volvc cou:i:g t|c l::cc cs| ilows
i:ou :cvious io:ccsts wit| t|c cs| ilows :clizcc to ctc li co:sicc:|lc
ccvitio:s :isc, it is iuo:t:t to t|c t|cu i:to ccou:t i: c:ccit sscssuc:t
A:ot|c: qulittivc icto: to |c sscsscc is t|c iuliilluc:t oi scciiic :cqui:c
uc:ts, suc| s co:st:uctio: :cqui:cuc:ts, c:vi:o:uc:tl :otcctio: :cqui:c
uc:ts :c t|c li|c l: cscs w|c:c t|csc :cqui:cuc:ts :c :ot iuliillcc, t|c :o|
cct u, |c ccl,cc o: cvc: c:c:gc:cc
As t|c lo: is :cic usi:g t|c :occccs oi t|c :oc:t, ii::ccc, t|c occu
:c, :tc will |c oi :ticul: i:tc:cst to t|c lc:cc: i: cscs w|c:c t|c :o
c:t, i: qucstio: is :c:tcc out
2.5 Retail Customers
l: t|c :ctil scguc:t, wc u|c gc:c:l cisti:ctio: |ctwcc: mass-market bank-
ing :c private banking l: co:t:st to t|c lscl ll scguc:ttio: :oc|, ou:
ciscussio: oi t|c :ctil scguc:t o:l, i:cluccs lo:s to :ivtc i:civiculs, :ot to
\ls
Mass-market banking :cic:s to gc:c:l ;|ig|voluuc, |usi:css t::sctcc
wit| :ctil custouc:s lo: t|c u:osc oi c:ccit sscssuc:t, wc c: ciiic:c:titc
t|c iollowi:g st:c:cizcc :ocucts i: t|is co:tcxt
u::c:t ccou:ts
o:suuc: lo:s
:ccit c:cs
kcsicc:til co:st:uctio: lo:s
Private banking i:volvcs t::sctio:s wit| |ig|:ctwo:t| :ctil custouc:s
:c gocs |c,o:c t|c st:c:cizcc :ocucts uscc i: ussu:|ct |:|i:g l:i
vtc |:|i:g t|us ciiic:s i:ou ussu:|ct |:|i:g cuc to t|c sccil ii::ci:g
:cccs oi i:civicul custouc:s
D:li|c i: t|c gc:c:l scguc:ts ccsc:i|cc |ovc, wc |vc lso i:cluccc
product component i: t|c :ctil custouc: scguc:t I|is :oc| coulics wit|
t|c iutu:c :cqui:cuc:ts :isi:g i:ou t|c lscl ll :cgulto:, i:ucwo:| lo:
cxulc, t|is :oc| u|cs it ossi|lc to ccii:c :ctil lo: cciults o: t|c
lcvcl oi scciiic cxosu:cs i:stcc oi scciiic |o::owc:s
-
kti:g s,stcus io:
:ctil c:ccit icilitics |vc to |c |scc o: :is|s scciiic to |o::owc:s s wcll
s t|osc scciiic to t::sctio:s, :c t|csc s,stcus s|oulc lso i:clucc ll :clc
v:t c|:ctc:istics oi |o::owc:s :c t::sctio:s
10
l: ou: :csc:ttio: oi t|c i:io:utio: ctcgo:ics to |c sscsscc, wc cisti:
guis| |ctwcc: sscssuc:t upon credit application :c o:goi:g :is| sscssuc:t
during the credit term
Credit card business is quitc siuil: to cu::c:t ccou:t |usi:css i: tc:us oi its
:is| lcvcl :c t|c icto:s to |c sscsscc lo: t|is :cso:, it is :ot c:ti:cl, :cc
css:, to ccii:c sc:tc scguc:t io: c:ccit c:c |usi:css
2.5.1 Mass-Market Banking
Current Accounts
Upon Credit Application
As st:c:cizcc cocuuc:ts ;suc| s ::ul ii::cil sttcuc:ts i: t|c co:o:tc
custouc: scguc:t, :c :ot vil|lc io: t|c cvlutio: oi :ctil custouc:`s
ii::cil situtio:, it is :cccss:, to sscss t|csc custouc:s o: t|c |sis oi i:io:
utio: t|c, :ovicc :cg:ci:g t|ci: sscts :c li|ilitics l: o:cc: to cvlutc
w|ct|c: t|c |o::owc: is li|cl, to |c |lc to ucct iutu:c ,uc:t o|ligtio:s,
lc:cc:s s|oulc lso clcultc |ucgct io: t|c |o::owc:
9
10
|:t o Dt kcqui:cuc:ts io: kctil ustouc:s
A: cssc:til qulittivc clcuc:t i: :ctil c:ccit sscssuc:t t t|c tiuc oi
c:ccit lictio: is socioccuog:|ic ct ;gc, :oicssio:, ctc, li t|c cus
touc: :cltio:s|i |s cxistcc io: souc tiuc, it is cvis|lc to sscss t|c t,c
:c |isto:, oi t|c :cltio:s|i
li:ll,, t|c c:ccit i:stitutio: s|oulc lso cvlutc cxtc::l ct i: t|c io:u
oi c:ccit :co:ti:g i:io:utio: ;cg i:ou t|c co:suuc: lo:s :cgistc:,
During the Credit Term
Du:i:g t|c tc:u oi t|c c:ccit t::sctio:, t|c lc:cc: s|oulc cvlutc ctivit,
ttc::s i: t|c custouc:`s cu::c:t ccou:t o: t|c qu:tittivc lcvcl I|is will
:cqui:c |isto:icl :cco:cs oi t|c co::cso:ci:g ccou:t ct lxulcs oi t|c
i:io:utio: to |c cc:ivcc i:ou t|csc ct i:clucc ovc:c:it c,s s wcll s cc|it
:c c:ccit |l:ccs, w|ic| u|c it ossi|lc to cctcct ,uc:t cis:utio:s t :
c:l, stgc
l: ccitio:, t|c gc:c:l ccvclouc:t oi t|c custouc: :cltio:s|i s wcll s
:cui:cc: :c ,uc:t |c|vio: s|oulc |c o|sc:vcc o: t|c qulittivc lcvcl
:ccit sscssuc:ts s|oulc lso t|c ccou:t oi :, sccil g:ccuc:ts ;cg
t:ou|lcc lo: :cst:uctu:i:g, ccic::l, ucc wit| t|c |o::owc: li ossi|lc,
t|c lc:cc: s|oulc :ct:icvc cu::c:t c:ccit :co:ti:g i:io:utio: i:ou cxtc::l
gc:cics o: :cgul: |sis
Consumer Loans
I|c :occcu:c licc to co:suuc: lo:s is :logous to t|c o:c uscc io: cu:
:c:t ccou:ts l: ccitio:, t|c u:osc oi t|c lo: ;cg ii::ci:g oi |ousc|olc
li:ccs, utouo|ilcs, ctc, c: lso |c i:cluccc i: c:ccit sscssuc:ts
l: t|is co:tcxt, t|c :occcu:c licc is :logous to t|c o:c uscc io: cu::c:t
ccou:ts I|c ccitio:l i:io:utio: to |c t|c: i:to ccou:t i:cluccs t|c
c:ccit stgc :c t|c :csicul tc:u oi t|c t::sctio: l:cticl cxc:ic:cc |s
s|ow: t|t co:suuc: lo:s :c csccill, :o:c to cciult i: t|c i:itil stgc
oi t::sctio:, w|ic| uc:s t|t t|c cciult :is| ssocitcc wit| co:suuc:
lo: tc:cs to ccc:csc ovc: tiuc
Credit Cards
Credit card business is quitc siuil: to cu::c:t ccou:ts i: tc:us oi its :is| lcvcl
:c t|c icto:s to |c sscsscc lo: t|is :cso:, it is :ot c:ti:cl, :cccss:, to
ccii:c sc:tc scguc:t io: c:ccit c:c |usi:css
l: gc:c:l, |:|s co :ot oiic: c:ccit c:cs t|cusclvcs |ut sc:vc s cist:i|utio:
outlcts io: c:ccit c:c cou:ics lowcvc:, s t|c c:ccit i:stitutio: usull, lso
|c:s li|ilit, ii t|c |o::owc: cciults, c:ccit sscssuc:t s|oulc gc:c:ll, iollow
t|c suc :oc| uscc io: cu::c:t ccou:ts
l:stcc oi o|sc:vi:g t|c custouc:`s |:| ccou:t ctivit, ttc::s, t|c c:ccit
i:stitutio: s|oulc sscss t|c custouc:`s c:ccit c:c t::sctio:s :c u:c|si:g
|c|vio: i: t|is co:tcxt As i: t|c csc oi cu::c:t ccou:ts, t|is will u|c it
ossi|lc to cctcct ,uc:t cis:utio:s t : c:l, stgc
I|c qulittivc ct ctcgo:ics sscsscc i: t|is scguc:t :c :o ciiic:c:t i:ou
t|osc cvlutcc io: cu::c:t ccou:ts
Residential Construction Loans
l: ccitio: to t|c |o::owc:`s cu::c:t ii::cil situtio: ;s i:cictcc |, t|c cus
touc: |iu|c:scli, :c t|c custouc:`s :o||lc iutu:c |ilit, to ucct ,uc:t
o|ligtio:s ;|scc o: |ucgct clcultio:s,, t|c ;:csicc:til, :oc:t, ii::ccc
lso l,s cccisivc :olc i: c:ccit sscssuc:t io: t|is scguc:t, s t|is :oc:t,
will sc:vc s colltc:l i: t|c csc oi cciult lo: t|is :cso:, t|c ii: u:|ct
vluc :c :o||lc slc :occccs s|oulc |c clcultcc io: t|c :oc:t, l: o:cc:
to icilittc sscssuc:ts oi |ow t|c ii: u:|ct vluc oi t|c :oc:t, will
ccvclo i: t|c iutu:c, it is :cccss:, to co:sicc: its |isto:icl :icc ccvclo
uc:t li t|c :oc:t, ii::ccc i:cluccs uo:c t|: o:c :csicc:til u:it :c :t
oi it is to |c :c:tcc out, it is lso cvis|lc to sscss t|c cu::c:t :c cxcctcc
:c:t lcvcls oi cou:|lc :oc:tics
I|c :clcv:t qulittivc :c cxtc::l sou:ccs oi i:io:utio: i: t|is co:tcxt
:c :logous to t|c ot|c: su|scguc:ts i: ussu:|ct |:|i:g socioccuo
g:|ic ct, t|c t,c :c |isto:, oi t|c custouc: :cltio:s|i to ctc, :c
c:ccit :co:ti:g i:io:utio:
Du:i:g t|c tc:u oi t|c lo:, |:| ccou:t ctivit, ct c: lso :ovicc cssc:
til i:io:utio: l: ccitio:, t|c :oc:t,scciiic ct sscsscc t t|c tiuc oi
t|c c:ccit lictio: s|oulc lso |c |ct u to ctc As i: t|c csc oi co:suuc:
lo:s, t|c c:ccit stgc :c :csicul tc:u oi :csicc:til co:st:uctio: lo:s :c
lso sig:iiic:t wit| :cg:c to t|c :o||ilit, oi cciult li|cwisc, t|c gc:c:l
ccvclouc:t oi t|c custouc: :cltio:s|i, :cui:cc: :c ,uc:t |c|vio:, s
wcll s sccil g:ccuc:ts lso ccsc:vc sccil co:sicc:tio: I|c lc:cc: s|oulc
:ct:icvc uctcc c:ccit :co:ti:g i:io:utio: iuuccitcl, uo: t|c ii:st sig:s
oi cctc:io:tio: i: t|c custouc:`s c:ccitwo:t|i:css
2.5.2 Private Banking
:ccit sscssuc:t i: :ivtc |:|i:g ui:l, ciiic:s i:ou sscssuc:t i: uss
u:|ct |:|i:g i: t|t it :cqui:cs g:ctc: uou:t oi qu:tittivc i:io:utio:
i: o:cc: to c:su:c s o||cctivc c:ccit cccisio: s ossi|lc I|is is :cccss:, cuc
to t|c i:c:cscc lcvcl oi c:ccit :is| i: :ivtc |:|i:g I|c:cio:c, i: ccitio: to
|:| ccou:t ctivit, ct, i:io:utio: :oviccc |, t|c |o::owc: o: sscts :c
li|ilitics, s wcll s |ucgct clcultio:s, it is lso :cccss:, to collcct ct i:ou
tx cccl:tio:s :c i:couc tx :ctu::s I|c lc:cc: s|oulc lso t|c t|c |o:
:owc:`s c:ccit :co:ts i:to ccou:t :c vlutc colltc:l w|c:cvc: :cccss:,
3 Commonly Used Credit Assessment Models
l: c|tc: !, wc ccsc:i|cc |cst:cticc :oc| to scguc:ttio: :c
ccii:cc t|c ct :cqui:cuc:ts io: c:ccit sscssuc:t i: cc| scguc:t lcsiccs
t|c c:ctio: oi coulctc, |ig|qulit, ct sct, t|c uct|oc sclcctcc io: :oc
cssi:g ct :c gc:c:ti:g c:ccit sscssuc:ts |s : csccill, sig:iiic:t ciicct
o: t|c qulit, oi :ti:g s,stcu
I|is c|tc: |cgi:s wit| :csc:ttio: oi t|c c:ccit sscssuc:t uoccls
couuo:l, uscc i: t|c u:|ct, wit| ttc:tio: to t|c gc:c:l w, i: w|ic| t|c,
iu:ctio: :c to t|ci: lictio: i: :cticc I|is :csc:ttio: is :ot uc:t to
iul, t|t ll oi t|c uoccls :csc:tcc c: |c co:sicc:cc |cst:cticc
:oc|cs I|c :cxt c|tc: ciscusscs t|c suit|ilit, oi t|c v:ious uoccls :c
sc:tcc I|c uoccls ciscusscc iu:t|c: |clow :c s|ow: i: c|:t
l: ccitio: to t|csc u:c uoccls, wc i:cquc:tl, c:cou:tc: cou|i:tio:s
oi |cu:istic uct|ocs :c t|c ot|c: two uoccl t,cs i: :cticc I|c uoccls s
wcll s t|c co::cso:ci:g |,|:ic io:us :c ccsc:i|cc i: t|c scctio:s |clow
I|c uoccls ccsc:i|cc |c:c :c :iu:il, uscc to :tc |o::owc:s l: :i:ci
lc, |owcvc:, t|c :c|itcctu:cs ccsc:i|cc c: lso |c uscc to gc:c:tc t::sc
tio: :ti:gs
|:t ,stcutic vc:vicw oi :ccit Asscssuc:t \occls
l: t|is cocuuc:t, wc usc t|c tc:u :ti:g uoccls co:sistc:tl, i: t|c co:
tcxt oi c:ccit sscssuc:t co:i:g is u:cc:stooc s couo:c:t oi :ti:g
uoccl, io: cxulc i: cctio: .!, Dcvcloi:g t|c co:i:g lu:ctio:
: t|c ot|c: |:c, sco:i:g s couuo: tc:u io: c:ccit sscssuc:t
uoccls ;cg lictio: sco:i:g, |c|vio: sco:i:g i: :ctil |usi:css, is :ot
ciiic:c:titcc i:ou :ti:g i: t|is cocuuc:t |ccusc t|c tc:us :ti:g :c
sco:i:g :c :ot clc:l, ccli:ctcc i: gc:c:l usgc
3.1 Heuristic Models
lcu:istic uoccls ttcut to gi: i:sig|ts uct|ocicll, o: t|c |sis oi :cvious
cxc:ic:cc I|is cxc:ic:cc is :ootcc i:
su||cctivc :cticl cxc:ic:cc :c o|sc:vtio:s
co:|cctu:cc |usi:css i:tc::cltio:s|is
|usi:css t|co:ics :cltcc to scciiic sccts
l: c:ccit sscssuc:t, t|c:cio:c, t|csc uoccls co:stitutc : ttcut to usc
cxc:ic:cc i: t|c lc:ci:g |usi:css to u|c sttcuc:ts s to t|c iutu:c c:ccit
wo:t|i:css oi |o::owc: I|c qulit, oi |cu:istic uoccls t|us ccc:cs o: |ow
ccu:tcl, t|c, ccict t|c su||cctivc cxc:ic:cc oi c:ccit cxc:ts I|c:cio:c,
:ot o:l, t|c icto:s :clcv:t to c:ccitwo:t|i:css :c cctc:ui:cc |cu:isticll,,
|ut t|ci: i:iluc:cc :c wcig|t i: ovc:ll sscssuc:ts :c lso |scc o: su||cctivc
cxc:ic:cc
l: t|c ccvclouc:t oi t|csc :ti:g uoccls, t|c icto:s uscc co :ot u:cc:go
sttisticl vlictio: :c otiuiztio:
l: :cticc, |cu:istic uoccls :c oitc: g:oucc u:cc: t|c |cci:g oi expert
systems l: t|is cocuuc:t, |owcvc:, t|c tc:u is o:l, uscc io: scciiic clss oi
|cu:istic s,stcus ;scc scctio: !1!,
3.1.1 Classic Rating Questionnaires
lssic :ti:g qucstio::i:cs :c ccsig:cc o: t|c |sis oi c:ccit cxc:ts` cxc
:ic:cc lo: t|is u:osc, t|c lc:cc: ccii:cs clc:l, :swc:|lc qucstio:s :cg:c
i:g icto:s :clcv:t to c:ccitwo:t|i:css :c ssig:s iixcc :uu|c:s oi oi:ts to
scciiic icto: vlucs ;ic :swc:s, I|is is : cssc:til ciiic:c:cc |ctwcc: cls
sic :ti:g qucstio::i:cs :c qulittivc s,stcus, w|ic| llow t|c usc: souc
ccg:cc oi cisc:ctio: i: sscssuc:t :cit|c: t|c icto:s :o: t|c oi:ts ssig:cc
:c otiuizcc usi:g sttisticl :occcu:cs, :t|c:, t|c, :cilcct t|c su||cctivc
:isls oi t|c cxc:ts i:volvcc i: ccvcloi:g t|csc s,stcus
lo: t|c u:osc oi c:ccit sscssuc:t, t|c i:civicul qucstio:s :cg:ci:g ic
to:s :c to |c :swc:cc |, t|c :clcv:t custouc: sc:vicc :c:csc:ttivc o: clc:|
t t|c |:| I|c :csulti:g oi:ts io: cc| :swc: :c cccc u to ,iclc t|c totl
:uu|c: oi oi:ts, w|ic| i: tu:: s|ccs lig|t o: t|c custouc:`s c:ccitwo:t|i:css
|:t s|ows sulc cxcc:t i:ou clssic :ti:g qucstio::i:c uscc i:
t|c :ctil scguc:t
l: t|is cxulc, t|c c:ccit cxc:ts w|o ccvclocc t|c s,stcu ccii:cc t|c
|o::owc:`s scx, gc, :cgio: oi o:igi:, i:couc, u:itl sttus, :c :oicssio:
s icto:s :clcv:t to c:ccitwo:t|i:css lc| scciiic icto: vluc is ssig:cc
iixcc :uu|c: oi oi:ts I|c :uu|c: oi oi:ts ssig:cc ccc:cs o: t|c :c
suucc iuct o: c:ccitwo:t|i:css l: t|is cxulc, :cticl cxc:ic:cc |s
s|ow: t|t ulc |o::owc:s ccuo:st:tc |ig|c: :is| oi cciult t|: iculc
|o::owc:s \lc |o::owc:s :c t|c:cio:c ssig:cc lowc: :uu|c: oi oi:ts
A:logous co:sicc:tio:s c: |c licc to t|c ot|c: icto:s
I|c |ig|c: t|c totl :uu|c: oi oi:ts is, t|c |cttc: t|c c:ccit :ti:g will |c
l: :cticc, clssic :ti:g qucstio::i:cs :c couuo: |ot| i: t|c :ctil :c
co:o:tc scguc:ts lowcvc:, lc:ci:g i:stitutio:s :c i:c:csi:gl, :clci:g
t|csc qucstio::i:cs wit| sttisticl :ti:g :occcu:cs
|:t lxcc:t i:ou lssic kti:g Qucstio::i:c
3.1.2 Qualitative Systems
l: qulittivc s,stcus,
11
t|c i:io:utio: ctcgo:ics :clcv:t to c:ccitwo:t|i:css
:c lso ccii:cc o: t|c |sis oi c:ccit cxc:ts` cxc:ic:cc lowcvc:, i: co:t:st
to clssic :ti:g qucstio::i:cs, qulittivc s,stcus co :ot ssig: iixcc :uu|c:
oi oi:ts to cc| scciiic icto: vluc l:stcc, t|c i:civicul i:io:utio: ct
cgo:ics |vc to |c cvlutcc i: qulittivc tc:us |, t|c custouc: sc:vicc :c
:csc:ttivc o: clc:| usi:g :cccii:cc sclc I|is is ossi|lc wit| t|c |cl oi
g:ci:g s,stcu o: o:ci:l vlucs ;cg gooc, ucciuu, oo:, I|c i:civic
ul g:ccs o: sscssuc:ts :c cou|i:cc to ,iclc : ovc:ll sscssuc:t I|csc
i:civicul sscssuc:t couo:c:ts :c lso wcig|tcc o: t|c |sis oi su||cctivc
cxc:ic:cc l:cquc:tl,, t|csc s,stcus lso usc cqul wcig|ti:g
l: o:cc: to c:su:c t|t ll oi t|c usc:s |vc t|c suc u:cc:st:ci:g oi sscss
uc:ts i: i:civicul :cs, qulittivc s,stcu uust |c ccou:icc |, usc:`s
u:ul uc| u:uls co:ti: vc:|l ccsc:itio:s io: cc| i:io:utio: ctcgo:,
:clcv:t to c:ccitwo:t|i:css :c io: cc| ctcgo:, i: t|c :ti:g sclc i: o:cc: to
cxli: t|c :cqui:cuc:ts |o::owc: |s to iuliill i: o:cc: to :cccivc cc:ti:
:ti:g
l: :cticc, c:ccit i:stitutio:s |vc uscc t|csc :occcu:cs i:cquc:tl,, csc
cill, i: t|c co:o:tc custouc: scguc:t l: :ccc:t ,c:s, |owcvc:, qulittivc
s,stcus |vc |cc: :clccc uo:c :c uo:c |, sttisticl :occcu:cs cuc to
iu:ovcc ct vil|ilit, :c t|c co:ti:ucc ccvclouc:t oi sttisticl uct|ocs
:c cxulc oi qulittivc s,stcu is t|c lVkl :ti:g s,stcu uscc |, t|c
lccc:l Associtio: oi Gc:u: ooc:tivc l:|s ;s|ow: |clow, I|is s,stcu,
|owcvc:, is cu::c:tl, |ci:g :clccc |, t|c sttisticl lVkll :ti:g :occcu:c
I|c lVkl :ti:g uscs . i:io:utio: ctcgo:ics :clcv:t to c:ccitwo:t|i
:css, :c t|csc ctcgo:ics :c su|civiccc i:to totl oi 1 su|c:itc:i ;scc
c|:t -,
11
In contrast to the usage in this guide, qualitative systems are also frequently referred to as expert systems in practice.
|:t - l:io:utio: tcgo:ics io: lVkl kti:gs
1!
All 1 su|:cs usc t|c g:ci:g s,stcu uscc i: Gc:u: sc|ools ;1 to o,
wit| 1 |ci:g t|c |cst ossi|lc g:cc,, :c t|c :it|uctic uc: oi t|c g:ccs
ssig:cc is clcultcc to ,iclc t|c vc:gc g:cc
W|c: c::,i:g out t|csc sscssuc:ts, usc:s :c :cqui:cc to c|c:c to sc
ciiic :ti:g guiccli:cs w|ic| cxli: t|c i:civicul c:ccitwo:t|i:css icto:s :c
ccii:c t|c i:io:utio: sou:ccs :c c:scctivcs to |c co:sicc:cc lc| scciiic
g:cc w|ic| c: |c ssig:cc is lso ccsc:i|cc vc:|ll,
l: t|c \:gcuc:t i:io:utio: ctcgo:,, io: cxulc, t|c g:ccs :c
ccsc:i|cc s iollows
1!
I|c |c, ciiic:c:cc |ctwcc: qulittivc uoccls :c clssic :ti:g qucstio:
:i:cs lics i: t|c usc:`s cisc:ctio: i: sscssuc:t :c i:tc::cttio: w|c: ssig:
i:g :ti:gs to t|c i:civicul icto:s
12
See KIRMSSE, S./JANSEN, S., BVR-II-Rating.
13
Cf. EIGERMANN, J., Quantitatives Credit-Rating unter Einbeziehung qualitativer Merkmale, p. 120.
|:t 10 kti:g clc i: t|c \:gcuc:t l:io:utio: tcgo:, io: lVkl kti:gs
3.1.3 Expert Systems
lxc:t s,stcus :c soitw:c solutio:s w|ic| iu to :cc:ctc |uu: :o|lcu
solvi:g |ilitics i: scciiic :c oi lictio: l: ot|c: wo:cs, cxc:t s,stcus
ttcut to solvc coulcx, oo:l, st:uctu:cc :o|lcus |, u|i:g co:clusio:s
o: t|c |sis oi i:tclligc:t |c|vio: lo: t|is :cso:, t|c, |clo:g to t|c :csc:c|
iiclc oi :tiiicil i:tclligc:cc :c :c lso oitc: :cic::cc to s |:owlccgc|scc
s,stcus
I|c cssc:til couo:c:ts oi : cxc:t s,stcu :c t|c |:owlccgc |sc :c
t|c i:ic:c:cc c:gi:c
1+
I|c |:owlccgc |sc i: t|csc s,stcus co:ti:s t|c |:owlccgc cqui:cc wit|
:cg:c to scciiic :o|lcu I|is |:owlccgc is |scc o: :uu|c:s, ctcs, icts
:c :ulcs s wcll s iuzz, cxc:t cxc:ic:cc, :c it is i:cquc:tl, :c:csc:tcc
usi:g :ocuctio: :ulcs ;iit|c: :ulcs, I|csc :ulcs :c i:tc:ccc to :cc:ctc
t|c :l,ticl |c|vio: oi c:ccit cxc:ts s ccu:tcl, s ossi|lc
I|c i:ic:c:cc c:gi:c li:|s t|c :ocuctio: :ulcs i: o:cc: to gc:c:tc co:clu
sio:s :c t|us ii:c solutio: to t|c :o|lcu
I|c cxc:t s,stcu oututs :til sscssuc:ts :c t|c ovc:ll sscssuc:t i:
t|c io:u oi vc:|l cxl:tio:s o: oi:t vlucs
Accitio:l clcuc:ts oi cxc:t s,stcus i:clucc
1.
Knowledge Acquisition Component
As t|c :csults oi : cxc:t s,stcu ccc:c |cvil, o: t|c :oc: :c utoctc
sto:gc oi cxc:t |:owlccgc, it uust |c ossi|lc to cx:c t|c |:owlccgc |sc
wit| :cw i:sig|ts t ll tiucs I|is is c|icvcc |, uc:s oi t|c |:owlccgc
cquisitio: couo:c:t
Dialog Component
I|c cilog couo:c:t i:cluccs clcuc:ts suc| s st:c:cizcc cilog |oxcs,
g:|ic :csc:ttio:s oi co:tc:t, |cl iu:ctio:s :c cs,tou:cc:st:c uc:u
st:uctu:cs I|is couo:c:t is cccisivc i: c:|li:g usc:s to oc:tc t|c s,stcu
ciicctivcl,
14
Cf. HEITMANN, C., Neuro-Fuzzy, p. 20ff.
15
Cf. BRUCKNER, B., Expertensysteme, p. 391.
Explanatory Component
I|c cxl:to:, couo:c:t u|cs t|c :o|lcusolvi:g :occss csic: to cou
:c|c:c I|is couo:c:t ccsc:i|cs t|c scciiic icts :c :ulcs t|c s,stcu uscs
to solvc :o|lcus l: t|is w,, t|c cxl:to:, couo:c:t c:ctcs t|c :cccss:,
t::s:c:c, :c :ouotcs ccct:cc uo:g t|c usc:s
Applied example:
:c cxulc oi : cxc:t s,stcu uscc i: |:|i:g :cticc is t|c s,stcu t
ouuc:z|:|
1o
I|c DlX ;Commerzbank Debitoren Experten System, uoccl
is licc to coucstic sull :c ucciuusizcc |usi:csscs
I|c |:owlccgc |sc io: DlX ws couilcc |, co:cucti:g su:vc,s wit|
c:ccit cxc:ts DlX sscsscs t|c iollowi:g icto:s io: ll |o::owc:s
Financial situation ;usi:g iigu:cs o: t|c |usi:css` ii::cil, liquicit, :c
i:couc situtio: i:ou ::ul ii::cil sttcuc:ts,
Development potential ;couilcc i:ou t|c :cs oi u:|ct otc:til, u:
gcuc:t otc:til :c :ocuctio: otc:til,
Industry prospects.
l: ll t|:cc :cs, t|c :clcv:t custouc: sc:vicc :c:csc:ttivc o: clc:| t
t|c |:| is :cqui:cc to :swc: qucstio:s o: ccii:cc c:ccitwo:t|i:css icto:s
l: t|is :occss, t|c usc: sclccts :ti:gs i:ou :cccii:cc sclc lc| :ti:g
otio: is li:|cc to :is| vluc :c co::cso:ci:g g:cc I|csc :ti:g otio:s,
:is| vlucs :c g:ccs wc:c ccii:cc o: t|c |sis oi su:vc,s co:cuctcc cu:i:g t|c
ccvclouc:t oi t|c s,stcu
A sc|cutic cig:u oi |ow t|is cxc:t s,stcu iu:ctio:s is :oviccc i:
c|:t 11
|:t 11 low t|c DlX lxc:t ,stcu Wo:|s
1
16
Cf. EIGERMANN, J., Quantitatives Credit-Rating unter Einbeziehung qualitativer Merkmale, p. 104ff.
17
Adapted from EIGERMANN, J., Quantitatives Credit-Rating unter Einbeziehung qualitativer Merkmale, p. 107.
I|c s,stcu t::sio:us ll oi t|c i:civicul c:ccitwo:t|i:css c|:ctc:istics
i:to g:ccs :c t|c: cou|i:cs t|cu to ,iclc : ovc:ll g:cc I|is i:volvcs two
stcs li:st t|c s,stcu cou:csscs g:ccs i:ou : i:civicul i:io:utio: ctc
go:, i:to :til g:cc |, clculti:g wcig|tcc vc:gc I|c wcig|ts uscc
|c:c wc:c cctc:ui:cc o: t|c |sis oi cxc:t su:vc,s I|c: t|c s,stcu gg:c
gtcs i:civicul sscssuc:ts to gc:c:tc : ovc:ll sscssuc:t I|c gg:cgtio:
:occss uscs t|c cxc:t s,stcu`s |ic::c|icl gg:cgtio: :ulcs, w|ic| t|c c:ccit
:l,st c::ot i:iluc:cc
3.1.4 Fuzzy Logic Systems
luzz, logic s,stcus c: |c scc: s sccil csc uo:g t|c clssic cxc:t s,stcus
ccsc:i|cc |ovc, s t|c, |vc t|c ccitio:l |ilit, to cvlutc ct usi:g iuzz,
logic l: iuzz, logic s,stcu, scciiic vlucs c:tc:cc io: c:ccitwo:t|i:css c:itc:i
:c :o lo:gc: lloctcc to si:glc li:guistic tc:u ;cg |ig|, low,, :t|c: t|c,
c: |c ssig:cc to uultilc tc:us usi:g v:ious ccg:ccs oi ucu|c:s|i
lo: cxulc, i: clssic cxc:t s,stcu t|c c:ccit :l,st coulc |c :cqui:cc to
:tc :ctu:: o: cquit, oi !0o: uo:c s gooc :c :ctu:: o: cquit, oi lcss t|:
!0s oo: lowcvc:, suc| cul ssig:uc:ts :c :ot i: li:c wit| |uu: sscss
uc:t |c|vio: A |uu: cccisio: u|c: woulc :cvc: :tc :ctu:: o: cquit, oi
1-- s low :c :ctu:: o: cquit, oi !00 s |ig| t t|c suc tiuc
luzz, logic s,stcus t|us c:|lc ii:c: g:ctio: w|ic| |c:s uo:c siuil:it,
to |uu: cccisio:u|i:g |c|vio: |, i:t:ocuci:g li:guistic v:i|lcs I|c |sic
u::c: i: w|ic| t|csc li:guistic v:i|lcs :c uscc is s|ow: i: c|:t 1!
|:t 1! lxulc oi li:guistic V:i|lc
1
18
Adapted from HEITMANN, C., Neuro-Fuzzy, p. 47.
I|is cxulc ccii:cs li:guistic tc:us io: t|c cvlutio: oi :ctu:: o: cquit,
;low, ucciuu, :c |ig|, :c ccsc:i|cs ucu|c:s|i iu:ctio:s io: cc| oi
t|csc tc:us I|c ucu|c:s|i iu:ctio:s u|c it ossi|lc to cctc:ui:c t|c
ccg:cc to w|ic| t|csc li:guistic tc:us l, to givc: lcvcl oi :ctu:: o: cquit,
l: t|c cig:u |ovc, io: cxulc, :ctu:: o: cquit, oi !! woulc |c :tcc
|ig| to ccg:cc oi 0., ucciuu to ccg:cc oi 0!., :c low to ccg:cc
oi 0
l: iuzz, logic s,stcu, uultilc cisti:ct i:ut vlucs :c t::sio:ucc usi:g
li:guistic v:i|lcs, itc: w|ic| t|c, u:cc:go iu:t|c: :occssi:g :c :c t|c:
cou:csscc i:to clc:, cisti:ct outut vluc I|c :ulcs licc i: t|is cou
:cssio: :occss stcu i:ou t|c u:cc:l,i:g |:owlccgc |sc, w|ic| uoccls
t|c cxc:ic:cc oi c:ccit cxc:ts I|c :c|itcctu:c oi iuzz, logic s,stcu is
s|ow: i: c|:t 1!
|:t 1! A:c|itcctu:c oi luzz, logic ,stcu
1-
l: t|c cou:sc oi fuzzification, ccg:ccs oi ucu|c:s|i i: li:guistic tc:us :c
cctc:ui:cc io: t|c i:ut vlucs usi:g li:guistic v:i|lcs I|c ct t|c:
u:cc:go iu:t|c: :occssi:g i: t|c iuzz, logic s,stcu solcl, o: t|c |sis oi t|csc
li:guistic tc:us
I|c iit|c: :ulcs i: t|c knowledge base uoccl t|c li:|s |ctwcc: i:ut vlucs
:c t|c outut vluc :c :c:csc:t t|c cxc:ic:cc oi c:ccit cxc:ts :c siu
lc cxulc oi : iit|c: :ulc uig|t |c ll :ctu:: o: cquit, is |ig| A:D cc|t
tocquit, :tio is low, Ill: c:ccitwo:t|i:css is gooc
The fuzzy inference engine is :cso:si|lc io: t|c couutc:|scc cvlutio:
oi t|c iit|c: :ulcs i: t|c |:owlccgc |sc
I|c :csult outut |, t|c iuzz, i:ic:c:cc c:gi:c is : ovc:ll sscssuc:t
|scc o: li:guistic v:i|lc At t|is oi:t, ccg:ccs oi ucu|c:s|i :c still
uscc, uc:i:g t|t t|c :csulti:g sttcuc:t is still cx:csscc i: iuzz, tc:us
19
Adapted from HEITMANN, C., Neuro-Fuzzy, p. 53.
I|c :csult i:ou t|c i:ic:c:cc c:gi:c is t|c:cio:c t::sio:ucc i:to clc: :c
cisti:ct c:ccit :ti:g i: t|c :occss oi defuzzification
Applied example:
I|c Dcutsc|c lu:ccs|:| uscs iuzz, logic s,stcu s uoculc i: its c:ccit
sscssuc:t :occcu:c
!0
I|c lu:ccs|:|`s c:ccit sscssuc:t :occcu:c io: co:o:tc |o::owc:s ii:st
uscs i:cust:,scciiic cisc:iui::t :l,sis to :occss iigu:cs i:ou ::ul ii::
cil sttcuc:ts :c qulittivc c|:ctc:istics oi t|c |o::owc:`s ccou:ti:g :c
ticcs I|c :csulti:g ovc:ll i:cicto: is ctcc usi:g iuzz, logic s,stcu w|ic|
:occsscs ccitio:l qulittivc ct ;scc c|:t 1+,
|:t 1+ A:c|itcctu:c oi Dcutsc|c lu:ccs|:|`s :ccit Asscssuc:t l:occcu:c
!1
l: t|is co:tcxt, t|c clssiiictio: :csults io: t|c sulc s|owcc t|t t|c c::o:
:tc c:occ i:ou 1 itc: cisc:iui::t :l,sis to 1o itc: :occssi:g
wit| t|c iuzz, logic s,stcu
3.2 Statistical Models
W|ilc |cu:istic c:ccit sscssuc:t uoccls :cl, o: t|c su||cctivc cxc:ic:cc oi
c:ccit cxc:ts, sttisticl uoccls ttcut to vc:ii, |,ot|cscs usi:g sttisticl
:occcu:cs o: : cui:icl ct|sc
lo: c:ccit sscssuc:t :occcu:cs, t|is i:volvcs io:uulti:g |,ot|cscs co:
cc::i:g otc:til c:ccitwo:t|i:css c:itc:i I|csc |,ot|cscs co:ti: sttc
20
Cf. BLOCHWITZ, STEFAN/EIGERMANN, JUDITH, Bonitatsbeurteilungsverfahren der Deutschen Bundesbank.
21
Adapted from BLOCHWITZ, STEFAN/EIGERMANN, JUDITH, Bonitatsbeurteilungsverfahren der Deutschen Bundesbank.
uc:ts s to w|ct|c: |ig|c: o: lowc: vlucs c: |c cxcctcc o: vc:gc io: sol
vc:t |o::owc:s cou:cc to i:solvc:t |o::owc:s As t|c solvc:c, sttus oi cc|
|o::owc: is |:ow: i:ou t|c cui:icl ct sct, t|csc |,ot|cscs c: |c vc:iiicc
o: :c|cctcc s :o:itc
ttisticl :occcu:cs c: |c uscc to cc:ivc : o||cctivc sclcctio: :c
wcig|ti:g oi c:ccitwo:t|i:css icto:s i:ou t|c vil|lc solvc:c, sttus i:io:
utio: l: t|is :occss, sclcctio: :c wcig|ti:g :c c::icc out wit| vicw
to otiuizi:g ccu:c, i: t|c clssiiictio: oi solvc:t :c i:solvc:t |o::owc:s
i: t|c cui:icl ct sct
I|c gooc:css oi iit oi :, sttisticl uoccl t|us ccc:cs |cvil, o: t|c qul
it, oi t|c cui:icl ct sct uscc i: its ccvclouc:t li:st, it is :cccss:, to
c:su:c t|t t|c ct sct is l:gc c:oug| to c:|lc sttisticll, sig:iiic:t sttc
uc:ts cco:c, it is lso iuo:t:t to c:su:c t|t t|c ct uscc ccu:tcl,
:cilcct t|c iiclc i: w|ic| t|c c:ccit i:stitutio: l:s to usc t|c uoccl li t|is
is :ot t|c csc, t|c sttisticl :ti:g uoccls ccvclocc will s|ow sou:c clssiii
ctio: ccu:c, io: t|c cui:icl ct sct uscc |ut will :ot |c |lc to u|c :cli
|lc sttcuc:ts o: ot|c: t,cs oi :cw |usi:css
I|c sttisticl uoccls uost i:cquc:tl, uscc i: :cticc cisc:iui::t :l
,sis :c :cg:cssio: uoccls :c :csc:tcc |clow A ciiic:c:t t,c oi sttisticl
:ti:g uoccl is :csc:tcc i: t|c c:sui:g ciscussio: oi :tiiicil :cu:l :ctwo:|s
3.2.1 Multivariate Discriminant Analysis
I|c gc:c:l o||cctivc oi uultiv:itc cisc:iui::t :l,sis ;\DA, wit|i:
c:ccit sscssuc:t :occcu:c is to cisti:guis| solvc:t :c i:solvc:t |o::owc:s
s ccu:tcl, s ossi|lc usi:g iu:ctio: w|ic| co:ti:s scvc:l i:ccc:cc:t
c:ccitwo:t|i:css c:itc:i ;cg iigu:cs i:ou ::ul ii::cil sttcuc:ts, \ulti
v:itc cisc:iui::t :l,sis is cxli:cc |c:c o: t|c |sis oi li:c: cisc:iu
i::t iu:ctio:, w|ic| is t|c :oc| :ccoui::tl, uscc i: :cticc l: :i:
cil, |owcvc:, t|csc cxl:tio:s lso l, to :o:li:c: iu:ctio:s
l: li:c: uultiv:itc cisc:iui::t :l,sis, wcig|tcc li:c: cou|i:tio: oi
i:cicto:s is c:ctcc i: o:cc: to c:|lc gooc :c |c cscs to |c clssiiicc wit|
s uuc| cisc:iui:to:, owc: s ossi|lc o: t|c |sis oi t|c clcultcc :csult
;ic t|c cisc:iui::t sco:c D,
1 o
0
o
1
1
1
o
2
1
2
... o
i
1
i
.
l: t|is cqutio:, i :cic:s to t|c :uu|c: oi ii::cil i:cicto:s i:cluccc i:
t|c sco:i:g iu:ctio:, 1
i
:cic:s to t|c scciiic i:cicto: vluc, :c o
i
st:cs
io: cc| i:cicto:`s cociiicic:t wit|i: t|c sco:i:g iu:ctio:
I|c c|:t |clow illust:tcs t|c :i:cilc |c|i:c li:c: cisc:iui::t :l,sis
o: t|c |sis oi twoc:itc:io: cxulc I|c otiuuu cutoii li:c :c:csc:ts
li:c: cou|i:tio: oi t|c two c:itc:i I|c li:c ws cctc:ui:cc wit| vicw to
cisc:iui:ti:g |ctwcc: solvc:t :c i:solvc:t |o::owc:s s ccu:tcl, s ossi|lc
;ic wit| ui:iuuu oi uisclssiiictio:s,
:c cv:tgc oi usi:g \DA cou:cc to ot|c: clssiiictio: :occcu:cs is
t|t t|c li:c: iu:ctio: :c t|c i:civicul cociiicic:ts c: |c i:tc::ctcc
ci:cctl, i: cco:ouic tc:us
|:t 1. low li:c: Disc:iui::t A:l,sis Wo:|s
li:c: uultiv:itc cisc:iui::t :l,sis :cqui:cs :o:ul cist:i|utio: ;i:
t|c st:ict ut|cuticl sc:sc oi t|c tc:u, i: t|c i:cicto:s cxui:cc I|c:c
io:c, t|c ssuutio: oi :o:ul cist:i|utio: |s to |c tcstcc io: t|c i:ut i:ci
cto:s l: cscs w|c:c t|c i:cicto:s uscc i: :l,sis :c :ot :o:ull, cist:i|
utcc, t|c \DA :csults u, |c cou:ouiscc
l: :ticul:, :ctitio:c:s s|oulc |c: t|is i: ui:c w|c: usi:g qulittivc
c:ccitwo:t|i:css c:itc:i, w|ic| gc:c:ll, couc i: t|c io:u oi o:ci:l vlucs
:c :c t|c:cio:c :ot :o:ull, cist:i|utcc lowcvc:, stucics |vc s|ow: t|t
:cscli:g t|c qulittivc c:ccitwo:t|i:css c:itc:i i: suit|lc u::c: c: lso
iuliill t|c t|co:cticl :c:cquisitcs oi \DA
!!
lo: cxulc, l:cstc: scli:g
c: |c uscc
!!
l: ccitio: to t|c ssuutio: oi :o:ul cist:i|utio:, li:c: cisc:iui::t
:l,sis lso :cqui:cs t|c suc v:i:cccov:i:cc ut:iccs io: t|c g:ous
to |c cisc:iui:tcc l: :cticc, |owcvc:, t|is :c:cquisitc is tt:i|utcc lcss sig
:iiic:cc
!+
Applied example:
l: :cticc, li:c: uultiv:itc cisc:iui::t :l,sis is uscc quitc i:cquc:tl, io:
t|c u:osc oi c:ccit sscssuc:t :c cxulc is l,c:isc|c l,o u:c Vc:
ci:s|:| AG`s :c|o: :ti:g s,stcu, w|ic| lics li:c: uultiv:itc cis
c:iui::t :l,sis to ::ul ii::cil sttcuc:ts A totl oi tc: i:cicto:s :c
:occsscc i: t|c cisc:iui::t iu:ctio: ;scc c|:t 1o, I|c :csulti:g cisc:iui
::t sco:c is :cic::cc to s t|c \AA vluc t l,c:isc|c l,o u:c Vc:ci:s
|:| \AA is t|c Gc:u: c:o:,u io: utoutcc ii::cil sttcuc:t :l,sis
;MAschinelle JahresabschluAnalyse).
22
Cf. BLOCHWITZ, S./EIGERMANN, J., Unternehmensbeurteilung durch Diskriminanzanalyse mit qualitativen Merkmalen.
23
HARTUNG, J./ELPELT, B., Multivariate Statistik, p. 282ff.
24
Cf. BLOCHWITZ, S./EIGERMANN, J., Effiziente Kreditrisikobeurteilung durch Diskriminanzanalyse mit qualitativen Merk-
malen, p. 10.
|:t 1o l:cicto:s i: t|c :c|o: kti:g ,stcu t l,c:isc|c l,o u:c Vc:ci:s|:|
!.
3.2.2 Regression Models
li|c cisc:iui::t :l,sis, :cg:cssio: uoccls sc:vc to uoccl t|c ccc:cc:cc oi
|i::, v:i|lc o: ot|c: i:ccc:cc:t v:i|lcs li wc l, t|is gc:c:l cci
i:itio: oi :cg:cssio: uoccls to c:ccit sscssuc:t :occcu:cs, t|c o||cctivc is
to usc cc:ti: c:ccitwo:t|i:css c|:ctc:istics ;i:ccc:cc:t v:i|lcs, to cctc:
ui:c w|ct|c: |o::owc:s :c clssiiicc s solvc:t o: i:solvc:t ;ccc:cc:t |i::,
v:i|lc, I|c usc oi :o:li:c: uoccl iu:ctio:s s wcll s t|c uxiuuu li|c
li|ooc uct|oc to otiuizc t|osc iu:ctio:s uc:s t|t :cg:cssio: uoccls lso
u|c it ossi|lc to clcultc ucu|c:s|i :o||ilitics :c t|us to cctc:ui:c
cciult :o||ilitics ci:cctl, i:ou t|c uoccl iu:ctio: I|is c|:ctc:istic is :cl
cv:t i: :ti:g uoccl cli|:tio: ;scc scctio: .!,
l: t|is co:tcxt, wc cisti:guis| |ctwcc: logit :c :o|it :cg:cssio: uoccls
I|c cu:vcs oi t|c uoccl iu:ctio:s :c t|ci: ut|cuticl :c:csc:ttio: :c
s|ow: i: c|:t 1 l: t|is c|:t, t|c iu:ctio: cc:otcs t|c cuuultivc st:c:c
:o:ul cist:i|utio:, :c t|c tc:u ;
, st:cs io: li:c: cou|i:tio: oi t|c

icto:s i:ut i:to t|c :ti:g uoccl, t|is cou|i:tio: c: lso co:ti: co:st:t
tc:u l, :cscli:g t|c li:c: tc:u, |ot| uoccl iu:ctio:s c: |c c|ustcc to
,iclc luost icc:ticl :csults I|c :csults oi t|c two uoccl t,cs :c t|c:cio:c
:ot su|st:till, ciiic:c:t
Duc to t|ci: :cltivc csc oi ut|cuticl :c:csc:ttio:, logit uoccls :c
uscc uo:c i:cquc:tl, io: :ti:g uoccli:g i: :cticc I|c gc:c:l u::c: i:
w|ic| :cg:cssio: uoccls wo:| is t|c:cio:c o:l, ciscusscc |c:c usi:g t|c logistic
:cg:cssio: uoccl ;logit uoccl, s : cxulc
l: ;|i::,, logistic :cg:cssio:, t|c :o||ilit, t|t givc: csc is to |c
clssiiicc s solvc:t ;o: i:solvc:t, is clcultcc usi:g t|c iollowi:g io:uul
!o
j
1
1 expb
0
b
1
K
1
b
2
K
2
... b
n
K
n
.
25
See EIGERMANN, J., Quantitatives Credit-Rating unter Einbeziehung qualitativer Merkmale, p. 102.
26
In the probit model, the function used is j
, where `. stands for standard normal distribution and the following

applies for

:

/
0
/
1
r
1
... /
i
r
i
.
|:t 1 lu:ctio:l lo:us io: logit :c l:o|it \occls
l: t|is io:uul, i :cic:s to t|c :uu|c: oi ii::cil i:cicto:s i:cluccc i: t|c
sco:i:g iu:ctio:, 1
i
:cic:s to t|c scciiic vluc oi t|c c:ccitwo:t|i:css c:i
tc:io:, :c /
i
st:cs io: cc| i:cicto:`s cociiicic:t wit|i: t|c sco:i:g iu:ctio:
;io: i 1. ...i, I|c co:st:t /
0
|s cccisivc iuct o: t|c vluc oi ;ic t|c
:o||ilit, oi ucu|c:s|i,
clccti:g : s|cc logistic iu:ctio: cu:vc c:su:cs t|t t|c vlucs ill
|ctwcc: 0 :c 1 :c c: t|us |c i:tc::ctcc s ctul :o||ilitics I|c t,icl
cu:vc oi logit iu:ctio: is s|ow: gi: i: :cltio: to t|c :csult oi t|c cxo:c:
til iu:ctio: ;sco:c, i: c|:t 1
|:t 1 logit lu:ctio: u:vc
I|c uxiuuu li|cli|ooc uct|oc is uscc to cstiutc t|c cociiicic:ts I|c
uxiuuu li|cli|ooc iu:ctio: ccsc:i|cs |ow i:cquc:tl, t|c ctul cciults
o|sc:vcc utc| t|c uoccl io:ccsts i: t|c ccvclouc:t sulc
!
27
Cf. KALTOFEN, D./MO
LLENBECK, M./STEIN, S., Risikofruherkennung im Kreditgeschaft mit kleinen und mittleren Unter-
nehmen, p. 14.
logistic :cg:cssio: |s :uu|c: oi cv:tgcs ovc: \DA li:st, logistic
:cg:cssio: cocs :ot :cqui:c :o:ul cist:i|utio: i: i:ut i:cicto:s I|is llows
logistic :cg:cssio: uoccls to :occss qulittivc c:ccitwo:t|i:css c|:ctc:istics
wit|out :cvious t::sio:utio: cco:c, t|c :csult oi logistic :cg:cssio: c:
|c i:tc::ctcc ci:cctl, s t|c :o||ilit, oi g:ou ucu|c:s|i I|is u|cs it
ossi|lc to ssig: o:c,c: cciult :tc to cc| :csult, io: cxulc |, :cscli:g
t|c vluc
logistic :cg:cssio: uoccls :c oitc: c|:ctc:izcc |, uo:c :o|ust
!
:c
uo:c ccu:tc :csults t|: t|osc gc:c:tcc |, cisc:iui::t :l,sis
l: :ccc:t ,c:s, logistic :cg:cssio: |s scc: uo:c wiccs:cc usc |ot| i:
cccuic :csc:c| :c i: :cticc I|is c: |c tt:i|utcc to t|c lowc: ccu:cs
it u|cs o: ct utc:il s wcll s its uo:c :o|ust :csults cou:cc to cisc:iu
i::t :l,sis
:c cxulc oi t|c :cticl usc oi logistic :cg:cssio: i: |:|s is t|c lVkll
:ti:g uoccl uscc |, t|c lccc:l Associtio: oi Gc:u: ooc:tivc l:|s to
:tc sull :c ucciuusizcc c:tc::iscs
!-
3.2.3 Artificial Neural Networks
Structure of Artificial Neural Networks
A:tiiicil :cu:l :ctwo:|s usc i:io:utio: tcc|:olog, i: : ttcut to siuultc
t|c w, i: w|ic| t|c |uu: |:i: :occsscs i:io:utio: l: siuliiicc tc:us,
t|c |uu: |:i: co:sists oi l:gc :uu|c: oi :c:vc cclls ;:cu:o:s, co::cctcc
to o:c :ot|c: |, :ctwo:| oi s,:scs :cu:o:s :cccivc sig:ls t|:oug| t|csc
s,:scs, :occss t|c i:io:utio:, :c ss :cw sig:ls o: t|:oug| ot|c: :cu
:o:s I|c sig:iiic:cc oi :ticul: iccc oi i:io:utio: is cctc:ui:cc |, t|c
t,c :c st:c:gt| oi t|c li:|s |ctwcc: :cu:o:s l: t|is w,, i:io:utio: c: |c
cist:i|utcc :c :occsscc i: :llcl c:oss t|c c:ti:c :ctwo:| oi :cu:o:s I|c
|uu: |:i: is |lc to lc:: cuc to its ccit, to c|ust t|c wcig|ti:g oi li:|s
|ctwcc: :cu:o:s
A:tiiicil :cu:l :ctwo:|s ttcut to uoccl t|is |iologicl :occss A: :ti
iicil :cu:l :ctwo:| co:sists oi : i:ut l,c:, t|c i::c: l,c:s :c : outut
l,c: ;scc c|:t 1-,
I|c i:ut l,c: sc:vcs t|c u:osc oi t|i:g i: i:io:utio: ;cg scciiic
i:cicto: vlucs, :c ssi:g it o: to t|c cow:st:cu :cu:o:s vi t|c co::cc
tio:s s|ow: i: t|c cig:u |clow I|csc li:|s :c ssig:cc wcig|ts i: : :ti
iicil :cu:l :ctwo:| :c t|us co:t:ol t|c ilow oi i:io:utio:
l: t|c :cu:o:s, ll i:coui:g i:io:utio: i
;
is ii:st li:|cc wit| vluc . I|is
is co:c |, uc:s oi siulc suu iu:ctio: lc| iccc oi i:io:utio: is t|c:
ssig:cc co::cctio: wcig|t n I|c cou:csscc vluc . is t::sio:ucc i:to
vluc o |, :o:li:c: iu:ctio: I|c iu:ctio: uscc io: t|is u:osc ccc:cs
o: t|c scciiic uoccl :c cxulc is t|c iollowi:g logistic iu:ctio:
o
1
1 c
.
.
28
Cf. KALTOFEN, D./MO
LLENBECK, M./STEIN, S., Risikofruherkennung im Kreditgeschaft mit kleinen und mittleren Unter-
nehmen, p. 14.
29
Cf. STUHLINGER, MATTHIAS, Rolle von Ratings in der Firmenkundenbeziehung von Kreditgenossenschaften, p. 72.
|:t 1- A:c|itcctu:c oi : A:tiiicil :cu:l :ctwo:|
|:t !0 low :cu:o:s Wo:|
I|is t::sio:ucc vluc is sscc o: to ll cow:st:cu :cu:o:s, w|ic| i:
tu:: c::, out t|c suc :occcu:c wit| t|c outut icto:s i:ou t|c ust:cu
:cu:o:s |:t !0 givcs sc|cutic ccictio: oi |ow :cu:o: wo:|s l: gc:
c:l, ot|c: :o:li:c: iu:ctio:s c: |c uscc i:stcc oi t|c logistic iu:ctio:
:cc t|c i:io:utio: |s sscc t|:oug| t|c i::c: l,c:s, it is cclivc:cc to
t|c :cu:o: i: t|c outut l,c: I|is i:io:utio: :c:csc:ts t|c :ctwo:|`s out
ut, o: t|c :csult gc:c:tcc |, t|c :tiiicil :cu:l :ctwo:| I|c i::c: l,c:s
:c lso :cic::cc to s |iccc: l,c:s |ccusc t|c sttc oi t|c :cu:o:s i: t|csc
l,c:s is :ot visi|lc i:ou t|c outsicc
Training of Artificial Neural Networks
A: :tiiicil :cu:l :ctwo:| lc::s o: t|c |sis oi t:i:i:g ct scts io: w|ic|
t|c ctul co::cct outut is l:cc, |:ow: l: t|c t:i:i:g :occss, t|c :tiiicil
:cu:l :ctwo:| cou:cs t|c outut gc:c:tcc wit| t|c ctul outut :c
cts t|c :ctwo:| cco:ci:g to :, ccvitio:s it ii:cs l:o||l, t|c uost cou
uo:l, uscc uct|oc oi u|i:g suc| c|:gcs i: :ctwo:|s is t|c c|ustuc:t oi
wcig|ts |ctwcc: :cu:o:s I|csc wcig|ts i:cictc |ow iuo:t:t iccc oi
i:io:utio: is co:sicc:cc to |c io: t|c :ctwo:|`s outut l: cxt:cuc cscs,
t|c li:| |ctwcc: two :cu:o:s will |c cclctcc |, sctti:g t|c co::cso:ci:g
wcig|t to zc:o
A clssic lc::i:g lgo:it|u w|ic| ccii:cs t|c :occcu:c io: c|usti:g
wcig|ts is t|c |c|:ogtio: lgo:it|u I|is tc:u :cic:s to g:cic:t
ccscc:t uct|oc w|ic| clcultcs c|:gcs i: wcig|ts cco:ci:g to t|c c::o:s
ucc |, t|c :cu:l :ctwo:|
!0
l: t|c ii:st stc, outut :csults :c gc:c:tcc io: :uu|c: oi ct :cco:cs
I|c ccvitio: oi t|c clcultcc outut o
d
i:ou t|c ctul outut t
d
is ucs
u:cc usi:g : c::o: iu:ctio: I|c suuoisqu:cs c::o: iu:ctio: is i:cquc:tl,
uscc i: t|is co:tcxt
c
1
2
d
t
d
o
d
2
I|c clcultcc c::o: c: |c |c|:ogtcc :c uscc to c|ust t|c :clcv:t
wcig|ts I|is :occss |cgi:s t t|c outut l,c: :c c:cs t t|c i:ut l,c:
!1
W|c: t:i:i:g : :tiiicil :cu:l :ctwo:|, it is iuo:t:t to voic w|t is
:cic::cc to s ovc:iitti:g vc:iitti:g :cic:s to situtio: i: w|ic| : :tiiicil
:cu:l :ctwo:| :occsscs t|c suc lc::i:g ct :cco:cs gi: :c gi: u:til it
|cgi:s to :ccog:izc :c ucuo:izc scciiic ct st:uctu:cs wit|i: t|c sulc
I|is :csults i: |ig| cisc:iui:to:, owc: i: t|c lc::i:g sulc uscc, |ut low
cisc:iui:to:, owc: i: u:|:ow: sulcs I|c:cio:c, t|c ovc:ll sulc uscc
i: ccvcloi:g suc| :ctwo:|s s|oulc ccii:itcl, |c civiccc i:to lc::i:g, tcsti:g
:c vlictio: sulc i: o:cc: to :cvicw t|c :ctwo:|`s lc::i:g succcss usi:g
u:|:ow: sulcs :c to sto t|c t:i:i:g :occcu:c i: tiuc I|is :ccc to
civicc u t|c sulc lso i:c:cscs t|c qu:tit, oi ct :cqui:cc
Application of Artificial Neural Networks
:cu:l :ctwo:|s :c |lc to :occss |ot| qu:tittivc :c qulittivc ct
ci:cctl,, w|ic| u|cs t|cu csccill, suit|lc io: t|c ccictio: oi coulcx :t
i:g uoccls w|ic| |vc to t|c v:ious i:io:utio: ctcgo:ics i:to ccou:t
Alt|oug| :tiiicil :cu:l :ctwo:|s :cgul:l, ccuo:st:tc |ig| cisc:iui:to:,
owc: :c co :ot i:volvc sccil :cqui:cuc:ts :cg:ci:g i:ut ct, t|csc :t
i:g uoccls :c still :ot vc:, :cvlc:t i: :cticc I|c :cso:s io: t|is lic i: t|c
coulcx :ctwo:| uoccli:g :occcu:cs i:volvcc :c t|c |lc| |ox :tu:c oi
t|csc :ctwo:|s As t|c i::c: wo:|i:gs oi :tiiicil :cu:l :ctwo:|s :c :ot
t::s:c:t to t|c usc:, t|c, :c csccill, susccti|lc to ccct:cc :o|lcus
:c cxulc oi : :tiiicil :cu:l :ctwo:| uscc i: :cticc is t|c llk
;lctgclil:zkti:g
ll1+ uscc io: cou:ics w|ic| :c:c |l:cc

s|ccts I|is :tiiicil :cu:l :ctwo:| uscs 1+ ciiic:c:t iigu:cs i:ou ::ul ii::
cil sttcuc:ts s i:ut :uctc:s :c cou:csscs t|cu i:to : :sco:c, o:
t|c |sis oi w|ic| cou:ics :c ssig:cc to :ti:g clsscs
30
See HEITMANN, C., Neuro-Fuzzy, p. 85.
31
Cf. HEITMANN, C., Neuro-Fuzzy, p. 86ff.
l: :cticc, :ti:g uoccls w|ic| usc :tiiicil :cu:l :ctwo:|s gc:c:ll,
tti: |ig| to vc:, |ig| lcvcls oi cisc:iui:to:, owc:
!!
lowcvc:, w|c: vli
cti:g :tiiicil :cu:l :ctwo:|s it is cvis|lc to c:io:u :igo:ous tcsts i: o:cc:
to c:su:c t|t t|c |ig| cisc:iui:to:, owc: oi i:civicul uoccls is :ot cuc to
ovc:iitti:g
3.3 Causal Models
usl uoccls i: c:ccit sscssuc:t :occcu:cs cc:ivc ci:cct :l,ticl li:|s to
c:ccitwo:t|i:css o: t|c |sis oi ii::cil t|co:, l: t|c ccvclouc:t oi suc|
uoccls, t|is uc:s t|t sttisticl uct|ocs :c :ot uscc to tcst |,ot|cscs
gi:st : cui:icl ct sct
3.3.1 Option Pricing Models
I|c otio: :ici:g t|co:, :oc| suo:ts t|c vlutio: oi cciult :is| o: t|c
|sis oi i:civicul t::sctio:s wit|out usi:g cou:c|c:sivc cciult |isto:,
I|c:cio:c, t|is :oc| c: gc:c:ll, lso |c uscc i: cscs w|c:c suiiicic:t
ct sct oi |c cscs is :ot vil|lc io: sttisticl uoccl ccvclouc:t ;cg cis
c:iui::t :l,sis o: logit :cg:cssio:, lowcvc:, t|is :oc| cocs :cqui:c
ct o: t|c cco:ouic vluc oi cc|t :c cquit,, :c csccill, voltilitics
I|c ui: icc u:cc:l,i:g otio: :ici:g uoccls is t|t c:ccit cciult will
occu: w|c: t|c cco:ouic vluc oi t|c |o::owc:`s sscts ills |clow t|c cco
:ouic vluc oi its cc|t
!!
|:t !1 Gc:c:l l:cuisc oi tio: l:ici:g \occls
!+
l: t|c otio: :ici:g uoccl, t|c lo: t|c: out |, t|c cou:, is ssocitcc
wit| t|c u:c|sc oi : otio: w|ic| woulc llow t|c cquit, i:vcsto:s to stisi,
t|c clius oi t|c cc|t lc:cc:s |, |:ci:g ovc: t|c cou:, i:stcc oi :c,i:g
t|c cc|t i: t|c csc oi cciult
!.
I|c :icc t|c cou:, ,s io: t|is otio: co:
:cso:cs to t|c :is| :cuiuu i:cluccc i: t|c i:tc:cst o: t|c lo: I|c :icc oi
t|c otio: c: |c clcultcc usi:g otio: :ici:g uoccls couuo:l, uscc i: t|c
u:|ct I|is clcultio: lso ,iclcs t|c :o||ilit, t|t t|c otio: will |c cxc:
ciscc, t|t is, t|c :o||ilit, oi cciult
32
Cf. FU
SER, K., Mittelstandsrating mit Hilfe neuronaler Netzwerke, p. 372; cf. HEITMANN, C. , Neuro-Fuzzy, p. 20.
33
Cf. SCHIERENBECK, H., Ertragsorientiertes Bankmanagement Vol. 1.
34
Adapted from GERDSMEIER, S./KROB, B., Bepreisung des Ausfallrisikos mit dem Optionspreismodell, p. 469ff.
35
Cf. KIRMSSE, S., Optionspreistheoretischer Ansatz zur Bepreisung.
I|c :uctc:s :cqui:cc to clcultc t|c otio: :icc ; :is| :cuiuu, :c
t|c cu:tio: oi t|c o|sc:vtio: c:ioc s wcll s t|c iollowi:g
!o
lco:ouic vluc oi t|c cc|t
!
lco:ouic vluc oi t|c cquit,
Voltilit, oi t|c sscts
Duc to t|c :cqui:cc ct i:ut, t|c otio: :ici:g uoccl c::ot cvc: |c
co:sicc:cc io: lictio:s i: :ctil |usi:css
!
lowcvc:, gc:c:ti:g t|c ct
:cqui:cc to usc t|c otio: :ici:g uoccl i: t|c co:o:tc scguc:t is lso
:ot wit|out its :o|lcus, io: cxulc |ccusc t|c cco:ouic vluc oi t|c cou
:, c::ot |c cstiutcc :clisticll, o: t|c |sis oi u|licl, vil|lc i:io:u
tio: lo: t|is u:osc, i:|ousc l::i:g ct :c usull, :cqui:cc i:ou t|c
cou:, itscli I|c cou:,`s vluc c: lso |c clcultcc usi:g t|c ciscou:tcc
cs| ilow uct|oc lo: cxc|:gclistcc cou:ics, voltilit, is i:cquc:tl, csti
utcc o: t|c |sis oi t|c stoc| :icc`s voltilit,, w|ilc :cic:c:cc vlucs scciiic
to t|c i:cust:, o: :cgio: :c uscc i: t|c csc oi u:listcc cou:ics
l: :cticc, t|c otio: :ici:g uoccl |s o:l, |cc: iulcuc:tcc to liu
itcc cxtc:t i: Gc:u:sc|i:g cou:t:ics, ui:l, s : i:st:uuc:t oi c:ccit
sscssuc:t io: cxc|:gclistcc cou:ics
!-
lowcvc:, t|is uoccl is lso |ci:g
uscc io: u:listcc cou:ics s wcll
As c:ccit cciult o: t|c :t oi t|c cou:, is ossi|lc t :, tiuc cu:i:g
t|c o|sc:vtio: c:ioc ;:ot |ust t t|c c:c,, t|c :is| :cuiuu :c cciult :tcs
clcultcc wit| lu:oc:st,lc
+0
otio: :ici:g uoccl :c co:sc:vtivcl,
i:tc::ctcc s t|c lowc: liuits oi t|c :is| :cuiuu :c cciult :tc i: :cticc
Qulittivc cou:, vlutio: c:itc:i :c o:l, i:cluccc i: t|c otio: :ic
i:g uoccl to t|c cxtc:t t|t t|c u:|ct :iccs uscc s|oulc t|c t|is i:io:utio:
;ii vil|lc to t|c u:|ct :tici:ts, i:to ccou:t lc,o:c t|t, t|c otio:
:ici:g uoccl cocs :ot covc: qulittivc c:itc:i lo: t|is :cso:, t|c lic
tio: oi otio: :ici:g uoccls s|oulc |c :cst:ictcc to l:gc: cou:ics io: w|ic|
o:c c: ssuuc t|t t|c u:|ct :icc :cilccts qulittivc icto:s suiiicic:tl, ;ci
scctio: +!!,
3.3.2 Cash Flow (Simulation) Models
s| ilow ;siuultio:, uoccls :c csccill, wcll suitcc to c:ccit sscssuc:t io:
sccilizcc lc:ci:g t::sctio:s, s c:ccitwo:t|i:css i: t|is co:tcxt ccc:cs :i
u:il, o: t|c iutu:c cs| ilows :isi:g i:ou t|c sscts ii::ccc l: t|is csc, t|c
t::sctio: itscli ;:c :ot scciiic |o::owc:, is sscsscc cxlicitl,, :c t|c
:csult is t|c:cio:c :cic::cc to s transaction rating
s| ilow|scc uoccls c: lso |c :csc:tcc s v:itio: o: otio: :ic
i:g uoccls i: w|ic| t|c cco:ouic vluc oi t|c cou:, is clcultcc o: t|c
|sis oi cs| ilow
36
The observation period is generally one year, but longer periods are also possible.
37
For more information on the fundamental circular logic of the option pricing model due to the mutual dependence of the market
value of debt and the risk premium as well as the resolution of this problem using an iterative method, see JANSEN, S, Ertrags-
und volatilitatsgestutzte Kreditwurdigkeitsprufung, p. 75 (footnote) and VARNHOLT B., Modernes Kreditrisikomanagement, p.
107 ff. as well as the literature cited there.
38
39
40
In contrast to an American option, which can be exercised at any time during the option period.
l: :i:cil, it is ossi|lc to ccii:c cs| ilow i:ou v:ious c:scctivcs
w|ic| :c co:sicc:cc cqull, suit|lc Acco:ci:gl,, suit|lc vlutio: uoccl
c: |c sclcctcc cco:ci:g to t|c i:civicul :cqui:cuc:ts oi t|c o:g:iztio:
c:io:ui:g t|c vlutio: :c i: li:c wit| t|c u:osc oi t|c vlutio: l: t|is
co:tcxt, t|c totl i:cc cs| ilow vil|lc is :ticul:l, :clcv:t to vlutio:
+1
lo: t|c u:osc oi cou:, vlutio: o: citl u:|cts, i:cc cs| ilow is
clcultcc s lllIDA
+!
ui:us i:vcstuc:ts
+!
I|c vc:gc i:cc cs| ilowovc: t|c
lst iivc ,c:s gc:c:ll, sc:vcs s t|c oi:t oi cc:tu:c io: clculti:g cou
:,`s vluc Divici:g t|c vc:gc i:cc cs| ilow |, t|c wcig|tcc citl costs
io: cquit, :c cc|t ii::ci:g
++
,iclcs cou:, vluc w|ic| c: |c uscc s :
i:ut :uctc: i: t|c otio: :ici:g uoccl I|c voltilit, oi t|is vluc c: |c
clcultcc i: : :logous w, |scc o: t|c tiuc sc:ics uscc to cctc:ui:c t|c
vc:gc i:cc cs| ilow
Iwo t,cs oi uct|ocs c: |c uscc to cxt:oltc iutu:c cs| ilow o: t|c
|sis oi st cs| ilow ct
Analytical methods :c |scc o: tiuc sc:ics :l,sis uct|ocs, w|ic| couc i:
two io:us
Regression models c:ctc iu:ctio:l uoccl oi t|c tiuc sc:ics :c otiuizc
t|c uoccl :uctc:s |, ui:iuizi:g t|c ccvitio:s o|sc:vcc
Stochastic time series models ccict t|c tiuc sc:ics s t|c :cliztio: oi sto
c|stic :occss :c clcultc otiuuu cstiutcs io: t|c :occss :uctc:s
Simulation methods gc:c:tc :c wcig|t ossi|lc iutu:c :cliztio:s oi cs|
ilow o: t|c |sis oi |isto:icl ct o: i: t|c :oc| uo:c couuo:l, uscc
i: :cticc |, ccvcloi:g uc:occo:ouic uoccls w|ic| ccict t|c i:ut vl
ucs io: cs| ilow i: :cltio: to cc:ti: scc::ios ;cg t|c ovc:ll ccvclouc:t oi
t|c cco:ou,,
3.4 Hybrid Forms
l: :cticc, t|c uoccls ccsc:i|cc i: t|c :cvious scctio:s :c o:l, ::cl, uscc i:
t|ci: u:c io:us kt|c:, |cu:istic uoccls :c gc:c:ll, cou|i:cc wit| o:c oi
t|c two ot|c: uoccl t,cs ;sttisticl uoccls o: cusl uoccls, I|is :oc|
c: gc:c:ll, |c scc: s ivo:|lc, s t|c v:ious :oc|cs coulcuc:t cc|
ot|c: wcll lo: cxulc, t|c cv:tgcs oi sttisticl :c cusl uoccls lic i:
t|ci: o||cctivit, :c gc:c:ll, |ig|c: clssiiictio: c:io:u:cc i: cou:iso:
to |cu:istic uoccls lowcvc:, sttisticl :c cusl uoccls c: o:l, :occss
liuitcc :uu|c: oi c:ccitwo:t|i:css icto:s Wit|out t|c i:clusio: oi c:ccit
cxc:ts` |:owlccgc i: t|c io:u oi |cu:istic uoculcs, iuo:t:t i:io:utio:
o: t|c |o::owc:`s c:ccitwo:t|i:css woulc |c lost i: i:civicul cscs l: cci
tio:, :ot ll sttisticl uoccls :c c|lc oi :occssi:g qulittivc i:io:utio:
ci:cctl, ;s is t|c csc wit| cisc:iui::t :l,sis, io: cxulc,, o: t|c, :cqui:c
l:gc uou:t oi ct i: o:cc: to iu:ctio: :oc:l, ;cg logistic :cg:cssio:,,
t|csc ct :c i:cquc:tl, u:vil|lc i: |:|s l: o:cc: to o|ti: coulctc ic
41
Cf. JANSEN, S., Ertrags- und volatilitatsgestutzte Kreditwurdigkeitsprufung.
42
EBITDA: earnings before interest, tax, depreciation and amortization.
43
Cf. KEMPF, M., Dem wahren Aktienkurs auf der Spur. More detailed explanations on the general conditions of the cash flow
method can be found in JANSEN, S., Ertrags- und volatilitatsgestutzte Kreditwurdigkeitsprufung.
44
This interest rate is required in order to discount future earnings to their present value.
tu:c oi t|c |o::owc:`s c:ccitwo:t|i:css i: suc| cscs, it t|us u|cs sc:sc to
sscss qulittivc ct usi:g sulcuc:t:, |cu:istic uoccl
I|is |cu:istic couo:c:t lso i:volvcs c:ccit cxc:ts uo:c |cvil, i: t|c
:ti:g :occss t|: i: t|c csc oi utoutcc c:ccit sscssuc:t usi:g sttisticl
o: cusl uoccl, uc:i:g t|t cou|i:i:g uoccls will lso sc:vc to i:c:csc usc:
ccct:cc
l: t|c scctio:s |clow, t|:cc ciiic:c:t :c|itcctu:cs io: t|c cou|i:tio: oi
t|csc uoccl t,cs :c :csc:tcc
3.4.1 Horizontal Linking of Model Types
As sttisticl :c cusl uoccls ccuo:st:tc :ticul: st:c:gt| i: t|c sscss
uc:t oi qu:tittivc ct, :c t t|c suc tiuc uost oi t|csc uoccls c::ot
:occss qulittivc ct wit|out sig:iiic:t ccitio:l ciio:t, t|is cou|i:tio:
oi uoccl t,cs c: |c c:cou:tc:cc i:cquc:tl, i: :cticc A sttisticl uoccl
o: cusl uoccl is uscc to :l,zc ::ul ii::cil sttcuc:ts o: ;i: |:occ:
tc:us, to cvlutc |o::owc:`s ii::cil situtio: Qulittivc ct ;cg u:
gcuc:t qulit,, is cvlutcc usi:g |cu:istic uoculc i:cluccc i: t|c uoccl
lI is t|c: ossi|lc to uc:gc t|c outut :ocuccc |, t|csc two uoculcs to gc:
c:tc : ovc:ll c:ccit sscssuc:t
|:t !! lo:izo:tl li:|i:g oi kti:g \occls
Applied example:
:c :cticl cxulc oi t|is cou|i:tio: oi :ti:g uoccls c: |c iou:c i: t|c
Dcutsc|c lu:ccs|:|`s c:ccit sscssuc:t :occcu:c ccsc:i|cc i: scctio: !1+
A::ul ii::cil sttcuc:ts :c :l,zcc |, uc:s oi sttisticl cisc:iui::t
:l,sis I|is qu:tittivc c:ccitwo:t|i:css :l,sis is sulcuc:tcc wit| cci
tio:l qulittivc c:itc:i w|ic| :c sscsscc usi:g iuzz, logic s,stcu I|c
ovc:ll s,stcu is s|ow: i: c|:t !!
|:t !! A:c|itcctu:c oi Dcutsc|c lu:ccs|:|`s :ccit Asscssuc:t l:occcu:c
+.
3.4.2 Vertical Linking of Model Types Using Overrides
I|is :oc| li:|s :til :ti:gs to gc:c:tc :ooscc clssiiictio:, w|ic|
c: t|c: |c uociiicc |, c:ccit cxc:t to ,iclc t|c ii:l c:ccit :ti:g I|is
cow:st:cu uociiictio: couo:c:t |scc o: cxc:t |:owlccgc co:stitutcs
sc:tc t,c oi |,|:ic uoccl I|is cou|i:tio: ii:st sscsscs qu:tittivc
s wcll s qulittivc c:ccitwo:t|i:css c|:ctc:istics usi:g sttisticl o: cusl
uoccl I|c :csult oi t|is sscssuc:t is :ooscc clssiiictio: w|ic| c: t|c:
|c uociiicc ;wit|i: cc:ti: liuits, |, c:ccit :l,sts o: t|c |sis oi t|ci: cxc:t
|:owlccgc
l: t|csc cou|i:cc uoccls, it is iuo:t:t to ccii:c :cciscl, t|c cscs :c
t|c ::gc i: w|ic| ovc::iccs c: |c uscc
l: :ticul:, icts w|ic| |vc l:cc, |cc: uscc i: sttisticl o: cusl :l
,sis uoculc s|oulc :ot sc:vc s t|c |sis io: ltc: uociiictio:s |, c:ccit :
l,sts l:stcc, t|c |cu:istic couo:c:t is iuo:t:t i: o:cc: to i:clucc icto:s
:clcv:t to c:ccitwo:t|i:css w|ic| :c o:l, |:ow: to t|c c:ccit :l,st :c
w|ic| coulc :ot |c covc:cc |, t|c ust:cu uoculc
li t|c ust:cu uoculc is uocclcc :oc:l,, |owcvc:, ovc::iccs s|oulc o:l,
|c :cccss:, i: souc cscs I|c cxccssivc usc oi ovc::iccs u, i:cictc lc| oi
usc: ccct:cc o: lc| oi u:cc:st:ci:g oi t|c :ti:g uoccl :c s|oulc t|c:c
io:c |c :cvicwcc c:ciull, i: t|c cou:sc oi vlictio:
45
Adapted from. BLOCHWITZ, STEFAN/EIGERMANN, JUDITH, Bonitatsbeurteilungsverfahren der Deutschen Bundesbank.
|:t !+ Vc:ticl li:|i:g oi kti:g \occls Dsi:g vc::iccs
3.4.3 Upstream Inclusion of Heuristic Knock-Out Criteria
I|c co:c clcuc:t oi t|is cou|i:tio: oi uoccl t,cs is t|c sttisticl uoculc
lowcvc:, t|is uoculc is :cccccc |, |:oc|out c:itc:i ccii:cc o: t|c |sis oi
t|c :cticl cxc:ic:cc oi c:ccit cxc:ts :c t|c |:|`s i:civicul st:tcg, li
otc:til |o::owc: iuliills |:oc|out c:itc:io:, t|c c:ccit sscssuc:t :occss
cocs :ot co:ti:uc cow:st:cu to t|c sttisticl uoculc
|:t !. l,|:ic lo:us Dst:cu l:clusio: oi lcu:istic l:oc|ut :itc:i
l:oc|out c:itc:i io:u : i:tcg:l :t oi c:ccit :is| st:tcgics :c :o
vl :cticcs i: c:ccit i:stitutio:s :c cxulc oi |:oc|out c:itc:io: uscc i:
:cticc is :cgtivc :co:t i: t|c co:suuc: lo:s :cgistc: li suc| :co:t is
iou:c, t|c |:| will :c|cct t|c c:ccit lictio: cvc: |cio:c cctc:ui:i:g cii
ic:c:titcc c:ccit :ti:g usi:g its i:|ousc :occcu:cs
4 Assessing the Models Suitability for
Various Rating Segments
l: gc:c:l, c:ccit sscssuc:t :occcu:cs |vc to iuliill :uu|c: oi :cqui:c
uc:ts :cg:clcss oi t|c :ti:g scguc:ts i: w|ic| t|c, :c uscc I|csc :cqui:c
uc:ts :c t|c :csult oi |usi:css co:sicc:tio:s licc to c:ccit sscssuc:t s
wcll s cocuuc:ts u|lis|cc o: t|c lkl :oc|cs u:cc: lscl ll I|c iu:c
uc:tl :cqui:cuc:ts :c listcc i: c|:t !o :c cxli:cc i: cctil iu:t|c: |clow
|:t !o lu:cuc:tl kcqui:cuc:ts oi kti:g \occls
4.1 Fulfillment of Essential Requirements
4.1.1 PD as Target Value
I|c :o||ilit, oi cciult :cilcctcc i: t|c :ti:g io:us t|c |sis io: :is| u:gc
uc:t lictio:s suc| s :is||scc lo: :ici:g lculti:g lD s t|c t:gct
vluc is t|c:cio:c |sic :c:cquisitc io: :ti:g uoccl to u|c sc:sc i: t|c
|usi:css co:tcxt
I|c ct sct uscc to clcultc lD is oitc: uissi:g i: heuristic models :c
uig|t |vc to |c ccuuultcc |, usi:g t|c :ti:g uoccl i: :cticc :cc t|is
:cqui:cuc:t is iuliillcc, it is ossi|lc to cli|:tc :csults to cciult :o||ilitics
cvc: i: t|c csc oi |cu:istic uoccls ;scc scctio: .!,
Statistical models :c ccvclocc o: t|c |sis oi : cui:icl ct sct, w|ic|
u|cs it ossi|lc to cctc:ui:c t|c t:gct vluc lD io: i:civicul :ti:g clsscs
|, cli|:ti:g :csults wit| t|c cui:icl ccvclouc:t ct li|cwisc, it is os
si|lc to cli|:tc t|c :ti:g uoccl ;cx ost, i: t|c cou:sc oi vlictio: usi:g t|c
ct gi:cc i:ou :cticl cclo,uc:t
:c cssc:til |c:ciit oi logistic regression is t|c ict t|t it c:|lcs t|c ci:cct
clcultio: oi cciult :o||ilitics lowcvc:, cli|:tio: o: :cscli:g u, lso
|c :cccss:, i: t|is csc ii t|c cciult :tc i: t|c sulc ccvitcs i:ou t|c vc:
gc cciult :tc oi t|c :ti:g scguc:t ccictcc
l: t|c csc oi causal models, t|c t:gct vluc lD c: |c clcultcc io: i:ci
vicul :ti:g clsscs usi:g ct gi:cc i:ou :cticl cclo,uc:t l: t|is csc,
t|c uoccl ci:cctl, oututs t|c cciult :uctc: to |c vlictcc
4.1.2 Completeness
l: o:cc: to c:su:c t|c coulctc:css oi c:ccit :ti:g :occcu:cs, lscl ll
:cqui:cs |:|s to t|c ll vil|lc i:io:utio: i:to ccou:t w|c: ssig:i:g :t
i:gs to |o::owc:s o: t::sctio:s
+o
I|is s|oulc lso |c uscc s guiccli:c io:
|cst :cticcs
As :ulc, classic rating questionnaires o:l, usc sull :uu|c: oi c|:ctc:
istics :clcv:t to c:ccitwo:t|i:css lo: t|is :cso:, it is iuo:t:t to :cvicw t|c
coulctc:css oi icto:s :clcv:t to c:ccitwo:t|i:css i: c:iticl lig|t li t|c
uoccl |s :occsscc suiiicic:t qu:tit, oi cxc:t |:owlccgc, it c: covc:
ll i:io:utio: ctcgo:ics :clcv:t to c:ccit sscssuc:t
li|cwisc, qualitative systems oitc: usc o:l, sull :uu|c: oi c:ccitwo:t|i
:css c|:ctc:istics As cxc:t |:owlccgc is lso :occsscc ci:cctl, w|c: t|c
uoccl is licc, |owcvc:, t|csc s,stcus c: covc: uost i:io:utio: ctcgo:ics
:clcv:t to c:ccitwo:t|i:css
I|c couutc:|scc :occssi:g oi i:io:utio: c:|lcs expert systems :c
fuzzy logic systems to t|c l:gc :uu|c: oi c:ccitwo:t|i:css c|:ctc:istics i:to
co:sicc:tio:, uc:i:g t|t suc| s,stcu c: covc: ll oi t|osc c|:ctc:istics ii
it is uocclcc :oc:l,
As l:gc :uu|c: oi c:ccitwo:t|i:css c|:ctc:istics c: |c tcstcc i: t|c
ccvclouc:t oi statistical models, it is ossi|lc to c:su:c t|c coulctc:css oi
t|c :clcv:t :is| icto:s ii t|c uoccl is ccsig:cc :oc:l, lowcvc:, i: u:,
cscs t|csc uoccls o:l, :occss icw c|:ctc:istics oi |ig| cisc:iui:to:,
owc: w|c: t|csc uoccls :c licc, :c t|c:cio:c it is :cccss:, to :cvicw
coulctc:css c:iticll, i: t|c cou:sc oi vlictio:
Causal models cc:ivc c:ccit :ti:gs usi:g t|co:cticl |usi:css|scc uoccl
:c usc o:l, icw cxclusivcl, qu:tittivc i:ut :uctc:s wit|out cxlic
itl, t|i:g qulittivc ct i:to ccou:t I|c i:io:utio: :clcv:t to c:ccitwo:
t|i:css is t|c:cio:c o:l, coulctc i: cc:ti: scguc:ts ;cg sccilizcc lc:ci:g,
l:gc co:o:tc custouc:s,
4.1.3 Objectivity
l: o:cc: to c:su:c t|c o||cctivit, oi t|c uoccl, classic rating questionnaire
s|oulc co:ti: qucstio:s o: c:ccitwo:t|i:css icto:s w|ic| c: |c :swc:cc
clc:l, :c wit|out :oou io: i:tc::cttio:
Ac|icvi:g |ig| cisc:iui:to:, owc: i: qualitative systems :cqui:cs t|t t|c
:ti:g g:ccs gc:c:tcc |, qulittivc sscssuc:ts usi:g :cccii:cc sclc :c s
o||cctivc s ossi|lc I|is c: o:l, |c c:su:cc |, :ccisc, u:cc:st:c|lc :c
lusi|lc usc:`s u:ul :c t|c :o:itc t:i:i:g ucsu:cs
As expert systems :c fuzzy logic systems cctc:ui:c t|c c:ccitwo:t|i:css
:csult usi:g ccii:cc lgo:it|us :c :ulcs, ciiic:c:t c:ccit :l,sts usi:g t|c
46
suc i:io:utio: :c t|c co::cct uoccl i:uts will :cccivc t|c suc :ti:g
:csults l: t|is :cscct, t|c uoccl c: |c co:sicc:cc o||cctivc
l: statistical models, c:ccitwo:t|i:css c|:ctc:istics :c sclcctcc :c
wcig|tcc usi:g : cui:icl ct sct :c o||cctivc uct|ocs I|c:cio:c, wc
c: :cg:c t|csc uoccls s o||cctivc :ti:g :occcu:cs W|c: t|c uoccl is su
licc :oc:l, wit| t|c suc i:io:utio:, ciiic:c:t c:ccit :l,sts will |c |lc
to gc:c:tc t|c suc :csults
li causal models :c sulicc wit| t|c co::cct i:ut :uctc:s, t|csc uoc
cls c: lso |c :cg:ccc s o||cctivc
4.1.4 Acceptance
As heuristic models :c ccsig:cc o: t|c |sis oi cxc:t oi:io:s :c t|c cxc
:ic:cc oi :ctitio:c:s i: t|c lc:ci:g |usi:css, wc c: ssuuc t|t t|csc uoccls
will ucct wit| |ig| ccct:cc
I|c cxl:to:, couo:c:t i: : expert system u|cs t|c clcultio: oi t|c
c:ccit sscssuc:t :csult t::s:c:t to t|c usc:, t|us c:|:ci:g t|c ccct:cc
oi suc| uoccls
l: fuzzy logic systems, ccct:cc u, |c lowc: t|: i: t|c csc oi cxc:t
s,stcus, s t|c io:uc: :cqui:c g:ctc: ccg:cc oi cxc:t |:owlccgc cuc to
t|ci: uoccli:g oi iuzzi:css wit| li:guistic v:i|lcs lowcvc:, t|c co:c oi
iuzz, logic s,stcus uoccls t|c cxc:ic:cc oi c:ccit cxc:ts, w|ic| uc:s it
is ossi|lc io: t|is uoccl t,c to tti: t|c :cccss:, ccct:cc ccsitc its
i:c:cscc coulcxit,
Statistical rating models gc:c:ll, ccuo:st:tc |ig|c: cisc:iui:to:, owc:
t|: |cu:istic uoccls lowcvc:, it c: |c uo:c ciiiicult to gi: uct|ocicl
ccct:cc io: sttisticl uoccls t|: io: |cu:istic uoccls :c cssc:til :cso:
io: t|is is t|c l:gc uou:t oi cxc:t |:owlccgc :cqui:cc io: sttisticl uoccls
l: o:cc: to i:c:csc ccct:cc :c to c:su:c t|t t|c uoccl is licc i: :
o||cctivcl, :oc: u::c:, usc: t:i:i:g scui::s :c i:cisc:s|lc
:c scvc:c ciscv:tgc io: t|c ccct:cc oi artificial neural networks is
t|ci: |lc| |ox :tu:c
+
I|c i:c:csc i: cisc:iui:to:, owc: c|icvcc |,
suc| uct|ocs c: ui:l, |c tt:i|utcc to t|c coulcx :ctwo:|`s |ilit, to lc::
:c t|c :llcl :occssi:g oi i:io:utio: wit|i: t|c :ctwo:| lowcvc:, it is
:cciscl, t|is coulcxit, oi :ctwo:| :c|itcctu:c :c t|c cist:i|utio: oi i:io:
utio: c:oss t|c :ctwo:|s w|ic| u|c it ciiiicult to cou:c|c:c t|c :ti:g
:csults I|is :o|lcu c: o:l, |c cou:tc:cc |, t|c :o:itc t:i:i:g ucs
u:cs ;cg sc:sitivit, :l,scs c: u|c t|c :occssi:g oi i:io:utio: i: :tiiicil
:cu:l :ctwo:| c: uo:c lusi|lc :c cou:c|c:si|lc to t|c usc:,
Causal models gc:c:ll, ucct wit| ccct:cc w|c: usc:s u:cc:st:c t|c
iu:cuc:tls oi t|c u:cc:l,i:g t|co:, :c w|c: t|c i:ut :uctc:s :c
ccii:cc i: : u:cc:st:c|lc w, w|ic| is lso :o:itc to t|c :ti:g scg
uc:t
Accct:cc i: i:civicul cscs will ccc:c o: t|c ccou:,i:g ucsu:cs
t|c: i: t|c cou:sc oi i:t:ocuci:g t|c :ti:g uoccl, :c i: :ticul: o: t|c
t::s:c:c, oi t|c ccvclouc:t :occss :c cttio:s s wcll s t|c qulit,
oi t:i:i:g scui::s
47
Cf. FU
SER, K., Mittelstandsrating mit Hilfe neuronaler Netzwerke, p. 374.

4.1.5 Consistency
Heuristic models co :ot co:t:cict :ccog:izcc scic:tiiic t|co:ics :c uct|ocs, s
t|csc uoccls :c |scc o: t|c cxc:ic:cc :c o|sc:vtio:s oi c:ccit cxc:ts
l: t|c ct sct uscc to ccvclo empirical statistical rating models, :cltio:
s|is |ctwcc: i:cicto:s u, :isc w|ic| co:t:cict ctul |usi:css co:sicc:
tio:s uc| co:t:cicto:, i:cicto:s |vc to |c co:sistc:tl, cxcluccc i:ou iu:
t|c: :l,scs liltc:i:g out t|csc :o|lcutic i:cicto:s will sc:vc to c:su:c
co:sistc:c,
Causal models ccict |usi:css i:tc::cltio:s|is ci:cctl, :c :c t|c:cio:c
co:sistc:t wit| t|c u:cc:l,i:g t|co:,
4.2 Suitability of Individual Model Types
I|c suit|ilit, oi cc| uoccl t,c is closcl, :cltcc to t|c ct :cqui:cuc:ts io:
t|c :cscctivc :ti:g scguc:ts ;scc c|tc: !, I|c uost :oui:c:t qucstio: i:
uoccl cvlutio: is w|ct|c: t|c qu:tittivc :c qulittivc ct uscc io: c:ccit
sscssuc:t i: i:civicul scguc:ts c: |c :occsscc :oc:l, W|ilc qu:tittivc
ct gc:c:ll, iuliills t|is co:citio: i: ll uoccls, ciiic:c:ccs :isc wit| :cg:c
to qulittivc ct i: sttisticl uoccls
l: tc:us oi cisc:iui:to:, owc: :c cli|:tio:, sttisticl uoccls ccuo:
st:tc clc:l, suc:io: c:io:u:cc i: :cticc cou:cc to |cu:istic uoccls
I|c:cio:c, |:|s :c i:c:csi:gl, :clci:g o: sulcuc:ti:g |cu:istic uoccls
wit| sttisticl uoccls i: :cticc I|is is csccill, t:uc i: t|osc scguc:ts io:
w|ic| it is ossi|lc to couilc suiiicic:t ct sct io: sttisticl uoccl ccvclo
uc:t ;i: :ticul: co:o:tc custouc:s :c ussu:|ct |:|i:g, lo: t|csc
custouc: scguc:ts, sttisticl uoccls :c t|c st:c:c
lowcvc:, t|c qulit, :c suit|ilit, oi t|c :ti:g uoccl uscc c::ot |c
sscsscc o: t|c |sis oi t|c uoccl t,c lo:c kt|c:, vlictio: s|oulc i:volvc
:cgul: :cvicws oi :ti:g uoccl`s qulit, o: t|c |sis oi o:goi:g oc:tio:s
I|c:cio:c, wc o:l, ccsc:i|c t|c cssc:til, o|sc:v|lc st:c:gt|s :c wc|:csscs
oi t|c :ti:g uoccls io: cc| :ti:g scguc:t |clow, wit|out ttcuti:g to :cc
ouuc:c, :csc:i|c o: :ulc out :ti:g uoccls i: i:civicul scguc:ts
4.2.1 Heuristic Models
l: :i:cilc, |cu:istic uoccls c: |c uscc i: ll :ti:g scguc:ts lowcvc:, i:
tc:us oi cisc:iui:to:, owc:, sttisticl uoccls :c clc:l, suc:io: to |cu:is
tic uoccls i: t|c co:o:tc custouc: scguc:t :c i: ussu:|ct |:|i:g
I|c:cio:c, t|c usc oi sttisticl uoccls is :cic:|lc i: t|osc :ticul: scguc:ts
ii suiiicic:t ct sct is vil|lc
W|c: |cu:istic uoccls :c uscc i: :cticc, it is iuo:t:t i: :, csc to
:cvicw t|ci: cisc:iui:to:, owc: :c io:ccsti:g ccu:c, i: t|c cou:sc oi vl
ictio:
Classic Rating Questionnaires
I|c cccisivc succcss couo:c:t i: clssic :ti:g qucstio::i:c is t|c usc oi
c:ccitwo:t|i:css c:itc:i io: w|ic| t|c usc: c: givc clc: :c u:cc:st:c|lc
:swc:s I|is will i:c:csc usc: ccct:cc s wcll s t|c o||cctivit, oi t|c
uoccl A:ot|c: c:itc:io: is t|c lusi|lc :c cou:c|c:si|lc ssig:uc:t oi
oi:ts to scciiic :swc:s A:swc:s w|ic| cxc:ic:cc |s s|ow: to i:cictc |ig|
c:ccitwo:t|i:css |vc to |c ssig:cc l:gc: :uu|c: oi oi:ts t|: :swc:s
w|ic| oi:t to lowc: c:ccitwo:t|i:css I|is c:su:cs co:sistc:c, :c is iu:c
uc:tl :c:cquisitc io: ccct:cc uo:g usc:s :c cxtc::l i:tc:cst g:ous
Qualitative Systems
I|c |usi:css|scc usc:`s u:ul is c:ucil to t|c succcssiul cclo,uc:t oi
qulittivc s,stcu I|is u:ul |s to ccii:c i: clc: :c u:cc:st:c|lc u:
:c: t|c ci:cuust:ccs u:cc: w|ic| usc:s :c to ssig: cc:ti: :ti:gs io: cc|
c:ccitwo:t|i:css c|:ctc:istic :l, i: t|is w, is it ossi|lc to :cvc:t c:ccit
:ti:gs i:ou |ccoui:g too ccc:cc:t o: t|c usc:`s su||cctivc c:cctio:s :c
i:civicul lcvcls oi |:owlccgc ou:cc to sttisticl uoccls, |owcvc:, qul
ittivc s,stcus :cui: scvc:cl, liuitcc i: tc:us oi o||cctivit, :c c:io:u:cc
c|ilitics
Expert Systems
uit|lc :ti:g :csults c: o:l, |c tti:cc usi:g : cxc:t s,stcu ii t|c, uoccl
cxc:t cxc:ic:cc i: cou:c|c:si|lc :c lusi|lc w,, :c ii t|c i:ic:c:cc
c:gi:c ccvclocc is c|lc oi u|i:g :cso:|lc co:clusio:s
Accitio:l succcss icto:s io: cxc:t s,stcus i:clucc t|c |:owlccgc cquis
itio: couo:c:t :c t|c cxl:to:, couo:c:t I|c cv:tgcs oi cxc:t s,s
tcus ovc: clssic :ti:g qucstio::i:cs :c qulittivc s,stcus :c t|ci: uo:c
:igo:ous st:uctu:i:g :c t|ci: g:ctc: oc::css to iu:t|c: ccvclouc:t low
cvc:, it is iuo:t:t to wcig| t|csc cv:tgcs gi:st t|c i:c:cscc ccvclo
uc:t ciio:t i:volvcc i: cxc:t s,stcus
Fuzzy Logic Systems
I|c couuc:ts |ovc :cg:ci:g cxc:t s,stcus lso l, to t|csc s,stcus
lowcvc:, iuzz, logic s,stcus :c su|st:till, uo:c coulcx t|: cxc:t s,s
tcus cuc to t|ci: ccitio:l uoccli:g oi iuzzi:css, t|c:cio:c t|c, i:volvc cvc:
g:ctc: ccvclouc:t ciio:t lo: t|is :cso:, t|c lictio: oi iuzz, logic s,s
tcu cocs :ot c: to |c :o:itc io: ussu:|ct |:|i:g o: io: sull
|usi:csscs ;ci scctio: !!, cou:cc to co:vc:tio:l cxc:t s,stcus
4.2.2 Statistical Models
l: t|c ccvclouc:t stgc, sttisticl uoccls lw,s :cqui:c suiiicic:t ct sct,
csccill, wit| :cg:c to cciultcc |o::owc:s I|c:cio:c, is oitc: iuossi|lc to
l, t|csc sttisticl uoccls to ll :ti:g scguc:ts i: :cticc lo: cxulc,
cciult ct o: govc::uc:ts :c t|c u|lic sccto:, ii::cil sc:vicc :ovicc:s,
cxc|:gclistcci:tc::tio:l cou:ics, s wcll s sccilizcc lc:ci:g oc:
tio:s :c ::cl, vil|lc i: qu:tit, suiiicic:t to ccvclo sttisticll, vlic
uoccls
I|c :cqui:cuc:ts :cltcc to sulc sizcs suiiicic:t io: ccvcloi:g sttis
ticl uoccl :c ciscusscc i: scctio: .1! l: t|t scctio:, wc :csc:t o:c os
si|lc uct|oc oi o|ti:i:g vlic uoccl :csults usi:g sullc: sulc ;|ootst:
:csuli:g,
l: ccitio: to t|c :cqui:cc ct qu:tit,, t|c :c:csc:ttivit, oi ct lso |s
to |c t|c: i:to ccou:t ;ci scctio: .1!,
ou:cc to |cu:istic uoccls, sttisticl uoccls gc:c:ll, ccuo:st:tc
|ig|c: cisc:iui:to:, owc:, uc:i:g t|t |cu:istic uoccls c: |c coulc
uc:tcc |, sttisticl uoccl couo:c:ts ii suiiicic:t ct sct is vil|lc l:
:cticc, utoutcc c:ccit cccisio:u|i:g is oitc: o:l, ossi|lc wit| sttisticl
uoccls cuc to t|c |ig| gooc:cssoiiit :cqui:cuc:ts i:volvcc
Multivariate Discriminant Analysis
As uct|oc, cisc:iui::t :l,sis c: gc:c:ll, |c licc to ll :ti:g scg
uc:ts lowcvc:, liuittio:s co :isc i: t|c csc oi qulittivc ct, w|ic| c:
:ot |c :occsscc ci:cctl, i: t|is io:u oi :l,sis I|c:cio:c, t|is t,c oi :ti:g
uoccl is csccill, suit|lc io: :l,zi:g quantitative data, io: cxulc ::ul
ii::cil sttcuc:ts io: co:o:tc custouc:s, |:| ccou:t ctivit, ct i: v:
ious :ti:g scguc:ts, s wcll s ii::cil i:io:utio: :oviccc |, :ctil custou
c:s
W|c: sscssi:g t|c lic|ilit, oi cisc:iui::t :l,sis uoccl, it is t
lcst :cccss:, to c|cc| w|ct|c: it iuliills t|c io:ul ut|cuticl :cqui:c
uc:ts, csccill, t|c :o:ul cist:i|utio: oi c:ccitwo:t|i:css c|:ctc:istics
l: :cticc, |owcvc:, t|csc :cqui:cuc:ts :c oitc: cis:cg:ccc io: qu:tittivc
i:cicto:s
li t|c ssuutio: oi :o:ul cist:i|utio: is :ot iuliillcc, t|c :csulti:g uoccl
coulc |c lcss t|: otiul, t|t is, t|c :ti:g uoccl will :ot :cccss:il, tti: its
uxiuuu cisc:iui:to:, owc: I|c:cio:c, |:|s s|oulc :cvicw t|c ciicct o:
t|c uoccl outut t t|c ltcst cu:i:g vlictio:
Regression Models
As uct|ocs, :cg:cssio: uoccls c: gc:c:ll, |c culo,cc i: ll :ti:g scg
uc:ts :o :ticul: :cqui:cuc:ts :c iuoscc o: t|c sttisticl c|:ctc:istics
oi t|c c:ccitwo:t|i:css icto:s uscc, w|ic| uc:s t|t ll t,cs oi quantitative
and qualitative creditworthiness characteristics c: |c :occsscc wit|out :o|
lcus
lowcvc:, w|c: o:ci:l ct :c :occsscc, it is :cccss:, to sul, suiii
cic:t qu:tit, oi ct io: cc| ctcgo:, i: o:cc: to c:|lc sttisticll, sig:iiic:t
sttcuc:ts, t|is lics csccill, to cciultcc |o::owc:s
+
A:ot|c: cv:tgc oi :cg:cssio: uoccls is t|t t|ci: :csults c: |c i:tc:
:ctcc ci:cctl, s cciult :o||ilitics I|is c|:ctc:istic icilittcs t|c cli|:
tio: oi t|c :ti:g uoccl ;scc scctio: .!1,
Artificial Neural Networks
l: tc:us oi uct|oc, :tiiicil :cu:l :ctwo:|s c: gc:c:ll, |c culo,cc i: ll
:ti:g scguc:ts A:tiiicil :cu:l :ctwo:|s co :ot iuosc io:ul ut|cuticl
:cqui:cuc:ts o: t|c i:ut ct, w|ic| uc:s t|t t|csc uoccls c: :occss
|ot| qu:tittivc :c qulittivc ct wit|out :o|lcus
l: o:cc: to lc:: co::cctio:s :oc:l,, |owcvc:, :tiiicil :cu:l :ctwo:|s
:cqui:c su|st:till, l:gc: qu:tit, oi ct i: t|c ccvclouc:t stgc t|:
ot|c: sttisticl uoccls \ct|ocs w|ic| c: |c licc to :cg:cssio: uoccls
:c cisc:iui::t :l,sis wit| sull sulc sizc ;cg |ootst::csuli:g,
48
Cf. EIGERMANN, J.; Quantitatives Credit-Rating mit qualitativen Merkmalen, p. 356.
c::ot |c culo,cc i: :tiiicil :cu:l :ctwo:|s lo: t|is :cso:, :tiiicil :cu
:l :ctwo:|s c: o:l, |c uscc io: scguc:ts i: w|ic| suiiicic:tl, l:gc qu:tit,
oi ct c: |c sulicc io: :ti:g uoccl ccvclouc:t
4.2.3 Causal Models
Option Pricing Models
l: gc:c:l, it is o:l, ossi|lc to cctc:ui:c t|c i:ut :uctc:s :cqui:cc io:
t|csc uoccls ;u:|ct vluc oi cquit,, voltilit, oi sscts, ctc, :cli|l, io:
exchange-listed companies :c financial service providers, s i: t|csc cscs t|c u:
|ct vluc oi cquit, :c t|c voltilit, oi sscts c: |c cc:ivcc i:ou stoc| :iccs
wit| :cltivc csc Dsi:g cs| ilow ;siuultio:, uoccls :c ccitio:l uoccli:g
ssuutio:s, t|c otio: :ici:g uoccl c: lso |c suit|lc io: l:gc cou:ics
w|ic| :c:c |l:cc s|ccts ii suiiicic:tl, lo:g tiuc sc:ics oi t|c :cccss:,
|l:cc s|cct ct is vil|lc :c cs| ilows c: |c clcultcc :cli|l, o: t|c
|sis oi l::i:g ct l: t|c csc oi sullc: |o::owc:s, t|c ciio:t :cccss:,
io: ;cou:,, vlutio: is too |ig| :c t|c clcultio: oi :uctc:s is too
u:cc:ti: lowcvc:, s|oulc |:| cccicc to ccvclo otio: :ici:g uoccls
io: suc| :ti:g scguc:ts :o:ct|clcss, it is :cccss:, to :cvicw t|c clcultcc
i:ut :uctc:s c:iticll, i: tc:us oi ccquc,
Cash Flow (Simulation) Models
s| ilow ;siuultio:, uoccls :c csccill, wcll suitcc to specialized lending, s
t|c :iu:, sou:cc oi iu:cs io: :c,i:g t|c cxosu:c is t|c i:couc :ocuccc
|, t|c sscts ii::ccc I|is uc:s t|t c:ccitwo:t|i:css cssc:till, ccc:cs o:
t|c iutu:c cs| ilows :isi:g i:ou t|c sscts li|cwisc, cs| ilow ;siuultio:,
uoccls c: |c uscc s :cliui::, :occssi:g uoculc io: otio: :ici:g uoc
cls l: :i:cilc, cs| ilow ;siuultio:, uoccls c: lso |c uscc io: cxc|:gc
listcc cou:ics :c i: souc cscs io: l:gc cou:ics w|ic| :c:c |l:cc
s|ccts
I|c cccisivc icto: i: t|c succcss oi cs| ilow ;siuultio:, uoccl is t|c
suit|lc clcultio: oi iutu:c cs| ilows :c ciscou:ti:g icto:s li cs| ilows
:c clcultcc ci:cctl, o: t|c |sis oi |isto:icl vlucs, it is iuo:t:t to c:su:c
t|t t|c ct sct uscc is :c:csc:ttivc oi t|c c:ccit i:stitutio: :c to :cvicw t|c
io:ccsti:g owc: oi t|c |isto:icl ct
5 Developing a Rating Model
l: t|c :cvious scctio:s, wc ciscusscc :ti:g uoccls couuo:l, uscc i: t|c u:
|ct s wcll s t|ci: st:c:gt|s :c wc|:csscs w|c: licc to scciiic :ti:g scg
uc:ts A uoccl`s suit|ilit, io: :ti:g scguc:t :iu:il, ccc:cs o: t|c ct
:c i:io:utio: ctcgo:ics :cqui:cc io: c:ccit sscssuc:t, w|ic| wc:c ccii:cc
i: tc:us oi |cst |usi:css :cticcs i: c|tc: !
I|c fundamental decision to usc scciiic :ti:g uoccl io: cc:ti: :ti:g
scguc:t is iollowcc |, t|c ctul ccvclouc:t oi t|c :ti:g :occcu:c I|is
c|tc: givcs cctilcc ccsc:itio: oi t|c cssc:til stcs i: t|c ccvclouc:t
oi :ti:g :occcu:c u:cc: t|c |cst:cticc :oc|
I|c :occcu:c ccsc:i|cc i: t|is cocuuc:t is |scc o: t|c ccvclouc:t oi
statistical :ti:g uoccl, s suc| s,stcus i:volvc sccil :cqui:cuc:ts :cg:ci:g
t|c ct sct :c sttisticl tcsti:g I|c succcss oi sttisticl :ti:g :occcu:cs i:
:cticc ccc:cs |cvil, o: t|c ccvclouc:t stgc l: u:, cscs, it is :o lo:
gc: ossi|lc to :cucc, c:iticl ccvclouc:t c::o:s o:cc t|c ccvclouc:t stgc
|s |cc: coulctcc ;o: t|c, c: o:l, |c :cuccicc wit| co:sicc:|lc ciio:t,
l: co:t:st, heuristic :ti:g uoccls :c ccvclocc o: t|c |sis oi cxc:t
cxc:ic:cc w|ic| is :ot vc:iiicc u:til ltc: wit| sttisticl tcsts :c : cui:icl
ct sct I|is givcs :isc to co:sicc:|lc ccg:ccs oi i:cccou i: ccvcloi:g |cu
:istic :ti:g :occcu:cs lo: t|is :cso:, it is :ot ossi|lc to :csc:t gc:c:ll,
lic|lc ccvclouc:t :occcu:c io: t|csc uoccls As cxc:t cxc:ic:cc is
:ot vc:iiicc |, sttisticl tcsts i: t|c ccvclouc:t stgc, vlictio: is csccill,
iuo:t:t i: t|c o:goi:g usc oi |cu:istic uoccls
koug|l, t|c suc lics to causal models l: t|csc uoccls, t|c :uctc:s
io: ii::cil t|co:,|scc uoccl :c cc:ivcc i:ou cxtc::l ct sou:ccs ;cg
voltilit, oi t|c u:|ct vluc oi sscts i:ou stoc| :iccs i: t|c otio: :ici:g
uoccl, wit|out c|cc|i:g t|c sclcctcc i:ut :uctc:s gi:st : cui:icl
ct sct i: t|c ccvclouc:t stgc l:stcc, t|c i:ut :uctc:s :c cctc:ui:cc
o: t|c |sis oi t|co:cticl co:sicc:tio:s uit|lc uoccli:g oi t|c i:ut :u
ctc:s is t|us cccisivc i: t|csc :ti:g uoccls, :c i: u:, cscs it c: o:l, |c
vc:iiicc i: t|c o:goi:g oc:tio: oi t|c uoccl
l: o:cc: to c:su:c t|c acceptance oi :ti:g uoccl, it is c:ucil to i:clucc
t|c expert experience oi :ctitio:c:s i: c:ccit sscssuc:t t|:oug|out t|c ccvcl
ouc:t :occss I|is is csccill, iuo:t:t i: cscs w|c:c t|c :ti:g uoccl is
to |c cclo,cc i: uultilc c:ccit i:stitutio:s, s is t|c csc i: ct ooli:g sol
utio:s
I|c ii:st stc i: :ti:g ccvclouc:t is generating the data set l:io: to t|is
:occss, it is :cccss:, to ccii:c t|c :ccisc :cqui:cuc:ts oi t|c ct to |c uscc,
to icc:tii, t|c ct sou:ccs, :c to ccvclo st:i:gc:t ct clc:si:g :occss
|:t ! l:occcu:c io: Dcvcloi:g kti:g \occl
luo:t:t :cqui:cuc:ts io: t|c cui:icl ct sct i:clucc t|c iollowi:g
kc:csc:ttivit, oi t|c ct io: t|c :ti:g scguc:t
Dt qu:tit, ;i: o:cc: to c:|lc sttisticll, sig:iiic:t sttcuc:ts,
Dt qulit, ;i: o:cc: to voic cisto:tio:s cuc to iulusi|lc ct,
lo: t|c u:osc oi developing a scoring function, it is ii:st :cccss:, to ccii:c
ctlog oi c:itc:i to |c cxui:cc I|csc c:itc:i s|oulc |c lusi|lc i:ou t|c
|usi:css c:scctivc :c s|oulc |c cxui:cc i:civicull, io: t|ci: cisc:iui:
to:, owc: ;univariate analysis, I|is is : iuo:t:t :cliui::, stgc |cio:c
cxui:i:g t|c i:tc:ctio: oi i:civicul c:itc:i i: sco:i:g iu:ctio: ;multivari-
ate analysis,, s it c:|lcs sig:iiic:t :ccuctio: i: t|c :uu|c: oi :clcv:t c:cc
itwo:t|i:css c:itc:i I|c uultiv:itc :l,scs ,iclc :til sco:i:g iu:ctio:s
w|ic| :c cou|i:cc i: : ovc:ll sco:i:g iu:ctio: i: t|c uoccl`s :c|itcctu:c
I|c sco:i:g iu:ctio: cctc:ui:cs sco:c w|ic| :cilccts t|c |o::owc:`s c:cc
itwo:t|i:css I|c sco:c lo:c cocs :ot :c:csc:t cciult :o||ilit,, uc:i:g
t|t it is :cccss:, to ssig: cciult :o||ilitics to sco:c vlucs |, uc:s oi
calibration, w|ic| co:cluccs t|c ctul :ti:g ccvclouc:t :occss
I|c c:sui:g stcs ;+ :c ., :c :ot :t oi t|c ctul :occss oi :ti:g ccvcl
ouc:t, t|c, i:volvc t|c validation oi :ti:g s,stcus cu:i:g t|c ctul oc:tio:
oi t|c uoccl I|csc stcs :c csccill, iuo:t:t i: :cvicwi:g t|c c:io:u
:cc oi :ti:g :occcu:cs i: o:goi:g oc:tio:s I|c sccts :clcv:t i: t|is
co:tcxt :c ccsc:i|cc i: c|tc: o ;Vlictio:,
5.1 Generating the Data Set
A :ti:g uoccl ccvclocc o: : cui:icl |sis c: o:l, |c s gooc s t|c
u:cc:l,i:g ct I|c qulit, oi t|c ct sct t|us |s cccisivc i:iluc:cc o:
t|c gooc:css oi iit :c t|c cisc:iui:to:, owc: oi :ti:g :occcu:c I|c ct
collcctio: :occss :cqui:cs g:ct ccl oi tiuc :c ciio:t :c uust u:cc:go :cg
ul: qulit, ssu::cc :cvicws I|c ui: stcs i: t|c :occss oi gc:c:ti:g
suit|lc ct sct :c ccsc:i|cc |clow
|:t ! l:occcu:c io: Gc:c:ti:g t|c Dt ct
5.1.1 Data Requirements and Sources
lcio:c ctul ct collcctio: |cgi:s, it is :cccss:, to ccii:c t|c ct :c i:io:
utio: to |c gt|c:cc cco:ci:g to t|c :cscctivc :ti:g scguc:t l: t|is :oc
css, ll ct ctcgo:ics :clcv:t to c:ccitwo:t|i:css s|oulc |c i:cluccc Wc cis
cusscc t|c ct ctcgo:ics :clcv:t to i:civicul :ti:g scguc:ts i: c|tc: !
li:st, it is :cccss:, to sccii, t|c ct to |c collcctcc uo:c :cciscl, o: t|c
|sis oi t|c ccii:cc ct ctcgo:ics I|is i:volvcs ccii:i:g v:ious qulit, ssu:
:cc :cqui:cuc:ts io: qu:tittivc, qulittivc :c cxtc::l ct
Quantitative data suc| s ::ul ii::cil sttcuc:ts :c su||cct to v:ious
lcgl :cgultio:s, i:cluci:g t|osc stiultcc u:cc: couuc:cil lw I|is uc:s
t|t t|c, :c l:gcl, st:c:cizcc, t|us u|i:g it is ossi|lc to cvlutc cou
:,`s cco:ouic succcss :cli|l, usi:g ccou:ti:g :tios clcultcc i:ou ::ul
ii::cil sttcuc:ts lowcvc:, i: souc cscs sccil :o|lcus :isc w|c:c v:
ious ccou:ti:g st:c:cs l, I|is lso |s to |c t|c: i:to ccou:t w|c:
i:cicto:s :c ccii:cc ;scc ccil o:sicc:tio:s i: l:tc::tio:l kti:g \oc
cls |clow,
l: u:, cscs, ot|c: qu:tittivc ct ;i:couc :c cxc:sc ccou:ts, i:io:
utio: i:ou |o::owc:s o: ssctsli|ilitics, ctc, :c i:cquc:tl, :ot vil|lc i:
st:c:cizcc io:u, u|i:g it :cccss:, to ccii:c clc: :c cou:c|c:si|lc
ct collcctio: :occcu:c I|is :occcu:c c: lso |c ccsig:cc io: usc i: ciiic:
c:t |u:iscictio:s
Qualitative questions :c lw,s c|:ctc:izcc |, su||cctivc lccw, i: sscss
uc:t l: o:cc: to voic u::cccss:il, |ig| qulit, losscs i: t|c :ti:g s,stcu, it
is iuo:t:t to co:sicc: t|c iollowi:g :cqui:cuc:ts
I|c qucstio:s |vc to |c wo:ccc s siul,, :cciscl, :c u:uist||l, s
ossi|lc I|c tc:us :c ctcgo:iztio:s uscc s|oulc |c cxli:cc i: t|c
i:st:uctio:s
lt uust |c ossi|lc to :swc: t|c qucstio:s u:u|iguousl,
W|c: :swc:i:g qucstio:s, usc:s s|oulc |vc :o lccw, i: sscssuc:t lt is
ossi|lc to cliui:tc t|is lccw, |, ;, ccii:i:g o:l, icw clc:l, wo:ccc
ossi|lc :swc:s, ;|, s|i:g ,cs:o qucstio:s, o: ;c, :cqucsti:g |:c :uu
|c:s
l: o:cc: to voic u::swc:cc qucstio:s cuc to lc| oi |:owlccgc o: t|c
usc:s` :t, usc:s uust |c |lc to :ovicc :swc:s o: t|c |sis oi t|ci: cxist
i:g |:owlccgc
Diiic:c:t :l,sts uust |c |lc to gc:c:tc t|c suc :csults
I|c qucstio:s uust c: sc:si|lc to t|c :l,st I|c qucstio:s s|oulc lso
givc t|c :l,st t|c iu:cssio: t|t t|c qulittivc qucstio:s will c:ctc
vlic |sis io: sscssuc:t
I|c :l,st uust :ot |c i:iluc:ccc |, t|c w, i: w|ic| qucstio:s :c s|cc
li c:ccit sscssuc:t lso :clics o: external data ;cxtc::l :ti:gs, c:ccit
:co:ti:g i:io:utio:, citl u:|ct i:io:utio:, ctc,, it is :cccss:, to uo:
ito: t|c qulit,, o||cctivit, :c c:cci|ilit, oi t|c ct sou:cc t ll tiucs
W|c: ccii:i:g ct :cqui:cuc:ts, t|c |:| s|oulc lso co:sicc: t|c vil
|ilit, oi ct lo: t|is :cso:, it is iuo:t:t to t|c t|c ossi|lc sou:ccs oi
cc| ct t,c i:to ccou:t cu:i:g t|is stgc lossi|lc ct collcctio:
:oc|cs :c ciscusscc i: scctio: .1!
Special Considerations in International Rating Models
l: t|c csc oi i:tc::tio:l :ti:g uoccls, t|c sclcctio: :c :occssi:g oi t|c
ct uscc io: t|c :ti:g uoccl s|oulc ccou:t io: cc| cou:t:,`s scciiic lcgl
i:ucwo:| :c sccil c|:ctc:istics l: t|is co:tcxt, o:l, two sccts :c
cu|sizcc
Dcii:itio: oi t|c cciult cvc:t
Dsc oi ccviti:g ccou:ti:g st:c:cs
I|c default event is t|c ui: t:gct vluc i: :ti:g uoccls uscc to cctc:ui:c
lD lo: t|is :cso:, it is :cccss:, to :otc t|t t|c couti|ilit, oi t|c cciult
cvc:t c:itc:io: uo:g v:ious cou:t:ics u, |c liuitcc cuc to cou:t:,scciiic
otio:s i: ccii:i:g lscl llcouli:t cciult cvc:t s wcll s ciiic:c:ccs i:
|:|:utc, lwo: :is| u:gcuc:t :cticc W|c: :ti:g uoccl is ccvclocc
io: o: licc i: uultilc cou:t:ics, it is :cccss:, to c:su:c t|c u:iio:u usc oi
t|c tc:u cciult cvc:t
Disc:c:cics i: t|c usc oi financial indicators u, :isc |ctwcc: i:civicul
cou:t:ics cuc to ciiic:c:t ccou:ti:g st:c:cs I|csc cisc:c:cics u, stcu
i:ou ciiic:c:t :ucs io: i:civicul ct iiclcs i: t|c ::ul ii::cil sttcuc:ts
o: i:ou ciiic:c:t vlutio: otio:s :c :co:ti:g :cqui:cuc:ts io: i:civicul
itcus i: t|c sttcuc:ts lt is t|c:cio:c :cccss:, to c:su:c t|c u:iio:u uc:i:g
oi scciiic ct iiclcs w|c: usi:g ct i:ou cou:t:ics o: :cgio:s w|c:c ciiic:c:t
ccou:ti:g st:c:cs l, ;cg Aust:i, lD, ll, I|is lics :logousl, to
:ti:g uoccls ccsig:cc to :occss ::ul ii::cil sttcuc:ts c:w: u usi:g
v:,i:g ccou:ti:g st:c:cs ;cg |l:cc s|ccts couli:t wit| t|c Aust:i:
ouuc:cil occ o: lA,
:c ossi|lc w, oi |:cli:g t|csc ciiic:c:t ccou:ti:g st:c:cs is to
ccvclo t::sltio: sc|cucs w|ic| u ciiic:c:t ccou:ti:g st:c:cs to cc|
ot|c: lowcvc:, t|is :oc| :cqui:cs i:cct| |:owlccgc oi t|c ccou:ti:g
s,stcus to |c lig:cc :c lso c:ctcs cc:ti: ccg:cc oi iu:ccisio: i: t|c
ct lt is lso ossi|lc to usc ui:l, ;o: o:l,, t|osc i:cicto:s w|ic| c: |c
licc i: u:iio:u u::c: :cg:clcss oi scciiic cctils i: ccou:ti:g st:c
:cs l: t|c suc w,, lccw, i: vlutio: wit|i: si:glc lcgl i:ucwo:| c: |c
|:uo:izcc |, usi:g scciiic i:cicto:s lowcvc:, t|is u, liuit i:cccou i:
ccvcloi:g uoccls to t|c cxtc:t t|t t|c i:tc::tio:l uoccl c::ot cx|ust
t|c vil|lc otc:til
l: ccitio:, it is lso ossi|lc to usc qualitative rating criteria suc| s t|c
cou:t:, o: t|c utiliztio: oi cxisti:g lccw, i: ccou:ti:g vlutio: i: o:cc:
to iu:ovc t|c uoccl
5.1.2 Data Collection and Cleansing
l: ccitio: to c:su:i:g ct qulit, |, ccii:i:g ct :cqui:cuc:ts t vc:, c:l,
stgc i: :ti:g ccvclouc:t, it is lso iuo:t:t to |cc ct qu:titics i: ui:c
ollccti:g suiiicic:t :uu|c: oi |o::owc:s io: :ti:g :occcu:c ccvclouc:t
c:su:cs t|c sttisticl sig:iiic:cc oi sttcuc:ts o: t|c suit|ilit, oi scciiic
c:ccitwo:t|i:css c:itc:i :c oi t|c sco:i:g iu:ctio:;s, ccvclocc Dcvcloi:g
:ti:g uoccl o: t|c |sis oi cui:icl ct :cqui:cs |ot| gooc :c |c cscs
l: li:c wit| t|c ccii:itio: oi cciult uscc i: lscl ll, |c |o::owc:s :c
ccii:cc s iollows i: t|c c:it lD ci:cctivc o: :cgulto:, citl :cqui:cuc:ts
+-
The credit institution considers that the obligor is unlikely to pay its credit obli-
gations to the credit institution, the parent undertaking or any of its subsidiaries
in full, without recourse by the credit institution to actions such as realising
security (if held).
The obligor is past due more than 90 days on any material credit obligation to
the credit institution, the parent undertaking or any of its subsidiaries.. Over-
drafts shall be considered as being past due once the customer has breached an
advised limit or been advised of a limit smaller than current outstandings.
W|c: cciult :o||ilitics i: t|c :ti:g uoccl :c uscc s t|c |sic :u
ctc: lD io: t|c lkl :oc|, t|c ccii:itio: oi t|osc :o||ilitics uust co:
io:u wit| t|c :cic:c:cc ccii:itio: i: ll cscs W|c: t|c cciult ccii:itio: is
cctc:ui:cc i: t|c cou:sc oi ccvcloi:g :ti:g uoccl, t|c o|sc:v|ilit, :c
vil|ilit, oi t|c cciult c|:ctc:istic :c c:ucil i: o:cc: to icc:tii, |c |o:
:owc:s co:sistc:tl, :c wit|out cou|t
Gc:c:ti:g data set for model development usull, i:volvcs suli:g, iull
su:vc, wit|i: t|c c:ccit i:stitutio:, o: ct ooli:g l: t|is co:tcxt, iull su:
vc, is lw,s :cic:|lc to suli:g l: :cticc, |owcvc:, t|c ciio:t i:volvcc i:
49
Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Article 1, No. 46. Annex D-5, No. 43 of
the draft directive lists concrete indications of imminent insolvency.
iull su:vc,s is oitc: too |ig|, csccill, i: cscs w|c:c cc:ti: ct ;suc| s qul
ittivc ct, :c :ot sto:cc i: t|c i:stitutio:`s lI s,stcus |ut |vc to |c collcctcc
i:ou c:|scc iilcs lo: t|is :cso:, suli:g is couuo: i: |:|s :tici
ti:g i: ct ooli:g solutio:s I|is :ccuccs t|c ct collcctio: ciio:t :cqui:cc
i: |:|s wit|out illi:g s|o:t oi t|c ct qu:tit, :cccss:, to ccvclo sttisti
cll, sig:iiic:t :ti:g s,stcu
Full Surveys
lull ct su:vc,s i: c:ccit i:stitutio:s i:volvc collccti:g t|c :cqui:cc ct o: ll
|o::owc:s ssig:cc to :ti:g scguc:t :c sto:cc i: |:|`s oc:tio:l s,s
tcus lowcvc:, iull su:vc,s ;i: t|c ccvclouc:t oi : i:civicul :ti:g s,stcu,
o:l, u|c sc:sc ii t|c c:ccit i:stitutio: |s suiiicic:t ct sct io: cc| scguc:t
co:sicc:cc
I|c ui: cv:tgc oi iull su:vc,s is t|t t|c cui:icl ct sct is :c:csc:
ttivc oi t|c c:ccit i:stitutio:`s o:tiolio
Data Pooling Opportunities and Implementation Barriers
As i: gc:c:l o:l, sull :uu|c: oi |o::owc:s cciult :c t|c ct |isto:ics i:
lI s,stcus :c :ot suiiicic:tl, lo:g, gt|c:i:g suiiicic:t :uu|c: oi |c cscs is
usull, t|c ui: c|llc:gc i: t|c ct collcctio: :occss Dsull,, t|is :o|lcu
c: o:l, |c solvcc |, uc:s oi data pooling uo:g scvc:l c:ccit i:stitutio:s
.0
Dt ooli:g i:volvcs collccti:g t|c :cqui:cc ct i:ou uultilc c:ccit i:stitu
tio:s I|c :ti:g uoccl io: t|c :ticiti:g c:ccit i:stitutio:s is ccvclocc o:
t|c |sis oi t|csc ct lc| c:ccit i:stitutio: co:t:i|utcs :t oi t|c ct to t|c
cui:icl ct sct, w|ic| is t|c: uscc |oi:tl, |, t|csc i:stitutio:s I|is u|cs it
ossi|lc to c:l:gc t|c ct sct :c t t|c suc tiuc s:cc t|c ciio:t :cqui:cc
io: ct collcctio: c:oss uultilc i:stitutio:s l: :ticul:, t|is :oc| lso
c:|lcs c:ccit i:stitutio:s to gt|c: suiiicic:t uou:t oi qulittivc ct
\o:covc:, t|c l:gc: ct sct i:c:cscs t|c sttisticl :cli|ilit, oi t|c :l,scs
uscc to ccvclo sco:i:g iu:ctio:s
D:li|c iull su:vc,s wit|i: i:civicul |:|s, ct ool iulics t|t t|c
cui:icl ct sct co:ti:s cscs i:ou uultilc |:|s lo: t|is :cso:, it is :cc
css:, to c:su:c t|t ll |:|s co:t:i|uti:g to t|c ct ool iuliill t|c :clcv:t
ct qulit, :cqui:cuc:ts I|c |sic :c:cquisitc io: |ig| ct qulit, is t|t t|c
:ticiti:g |:|s |vc suoot|l, iu:ctio:i:g lI s,stcus l: ccitio:, it is c:u
cil t|t t|c |:|s co:t:i|uti:g to t|c ool usc u:iio:u cciult ccii:itio:
A:ot|c: iuo:t:t scct oi ct ooli:g is c|c:c:cc to :, lic|lc
lcgl :cgultio:s, io: cxulc i: o:cc: to coul, wit| ct :otcctio: :c
|:|i:g scc:cc, :cqui:cuc:ts lo: t|is :cso:, ct s|oulc t lcst |c ucc
:o:,uous |, t|c :ticiti:g |:|s |cio:c |ci:g t::sic::cc to t|c cc:t:l
ct ool li t|c t::sic: oi c:so:l ct i:ou o:c |:| to :ot|c: c::ot
|c voiccc i: ct ooli:g, t|c: it is :cccss:, i: :, csc to c:su:c t|t t|c
ot|c: |:| c::ot cctc:ui:c t|c icc:tit, oi t|c custouc:s l: :, csc, t|c
t::sic: oi c:so:l ct :cqui:cs solic lcgl |sis ;lcgl ut|o:iztio:, co:sc:t
oi t|c :cscctivc custouc:,
50
Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Annex D-5, No. 52/53.
li :o iull su:vc, is co:cuctcc i: t|c cou:sc oi ct ooli:g, t|c ct collcc
tio: :occss |s to |c ccsig:cc i: suc| w, t|t t|c ct ool is :c:csc:ttivc
oi t|c |usi:css oi ll :ticiti:g c:ccit i:stitutio:s
I|c representativity oi t|c ct ool uc:s t|t it :cilccts t|c :clcv:t st:uc
tu:l c|:ctc:istics :c t|ci: :oo:tio:s to o:c :ot|c: i: t|c |sic ou
ltio: :c:csc:tcc |, t|c sulc l: t|is co:tcxt, io: cxulc, t|c |sic oul
tio: :cic:s to ll t::sctio:s i: givc: :ti:g scguc:t io: t|c c:ccit i:stitutio:s
co:t:i|uti:g to t|c ct ool :c cccisivc co:scquc:cc oi t|is ccii:itio: is t|t
wc c::ot sc| oi t|c ct ool`s :c:csc:ttivit, io: t|c |sic oultio: i: gc:
c:l, :t|c: its :c:csc:ttivit, wit| :cic:c:cc to cc:ti: c|:ctc:istics i: t|c
|sic oultio: w|ic| c: |c i:ic::cc i:ou t|c ct ool ;:c vicc vc:s,
lo: t|is :cso:, it is ii:st :cccss:, to ccii:c t|c :clcv:t :c:csc:ttivc
c|:ctc:istics oi ct ools I|c c|:ctc:istics t|cusclvcs will ccc:c o:
t|c :cscctivc :ti:g scguc:t l: co:o:tc :ti:gs, io: cxulc, t|c cist:i|u
tio: c:oss :cgio:s, i:cust:ics, sizc clsscs, :c lcgl io:us oi |usi:css o:g:
iztio: uig|t |c oi i:tc:cst l: t|c :ctil scguc:t, o: t|c ot|c: |:c, t|c cis
t:i|utio: c:oss :cgio:s, :oicssio:l g:ous, :c gc uig|t |c uscc s c|:c
tc:istics lo: t|csc c|:ctc:istics, it is :cccss:, to cctc:ui:c t|c i:cquc:c,
cist:i|utio: i: t|c |sic oultio:
li t|c ct ool couilcc o:l, cou:iscs sulc c:w: i:ou t|c |sic
oultio:, it will :tu:ll, |c iuossi|lc to utc| t|csc c|:ctc:istics cxctl,
i: t|c ct ool I|c:cio:c, : ccct|lc ccvitio: |:cwict| s|oulc |c
ccii:cc io: c|:ctc:istic t cc:ti: co:iicc:cc lcvcl ;scc c|:t !-,
|:t !- \t|cuticl Dcictio: oi kc:csc:ttivit,
I|c cxulc |clow is i:tc:ccc to illust:tc t|is :c:csc:ttivit, co:cct
Assuuc t|t !00 |:|s co:t:i|utc to ct ool l: o:cc: to ui:iuizc t|c
tiuc :c ciio:t :cqui:cc io: ct collcctio:, t|c i:civicul |:|s co :ot co:cuct
iull su:vc,s l:stcc, cc| |:| is :cqui:cc to co:t:i|utc !0 cscs i: t|c :cscc
tivc :ti:g scguc:t, uc:i:g t|t t|c sulc will cou:isc totl oi o,000
cscs
I|c oultio: co:sists oi ll t::sctio:s i: t|c :clcv:t :ti:g scguc:t io:
t|c c:ccit i:stitutio:s co:t:i|uti:g to t|c ct ool As t|c scguc:t i: qucstio:
is t|c co:o:tc scguc:t, t|c cist:i|utio: c:oss i:cust:ics is ccii:cc s :
cssc:til st:uctu:l c|:ctc:istic I|c sulc o:l, co:sists oi :t oi t|c |sic
oultio:, w|ic| uc:s t|t t|c cist:i|utio: oi i:cust:ics i: t|c sulc will
:ot utc| t|t oi t|c oultio: cxctl, lowcvc:, it is :cccss:, to c:su:c t|t
t|c sulc is :c:csc:ttivc oi t|c oultio: I|c:cio:c, it is :cccss:, to vc:
ii, t|t ccvitio:s i: i:cust:, cist:i|utio: c: o:l, occu: wit|i: :::ow |:c
wict|s w|c: ct :c collcctcc
Data Pooling Data Collection Process
I|is uct|oc oi c:su:i:g :c:csc:ttivit, |s iuuccitc co:scquc:ccs i: t|c
sclcctio: oi c:ccit i:stitutio:s to co:t:i|utc to ct ool li, io: cxulc,
:cgio:l cist:i|utio: l,s : iuo:t:t :olc, t|c: t|c |:|s sclcctcc io: t|c
ct collcctio: stgc s|oulc lso |c wcll cist:i|utcc c:oss t|c :clcv:t :cgio:s
i: o:cc: to voic : u:|l:ccc :cgio:l cist:i|utio: oi |o::owc:s
l: ccitio: to t|c sclcctio: oi suit|lc |:|s to co:t:i|utc to t|c ct ool,
t|c iollowi:g :cliui::, ts|s :c :cccss:, io: ct collcctio:
Dcii:itio: oi t|c ctlog oi ct to |c collcctcc ;scc scctio: .11, s wcll s
t|c :uu|c: oi gooc :c |c cscs to |c collcctcc c: |:|
l: o:cc: to c:su:c u:iio:u u:cc:st:ci:g, it is c:ucil to :ovicc cou:c
|c:sivc |usi:css|scc guicc ccsc:i|i:g cc| ct iiclc
lo: t|c s|c oi st:c:cizcc ct collcctio:, t|c |:|s s|oulc ccvclo u:i
io:u ct c:t:, tool I|is tool will icilittc t|c cc:t:l collcctio: :c cvl
utio: oi ct
A usc:`s u:ul is to |c :oviccc io: ct collcctio: :occcu:cs :c io: t|c
oc:tio: oi t|c ct c:t:, tool
l: o:cc: to c:su:c t|t t|c sulc ctu:cs uultilc stgcs oi t|c |usi:css
c,clc, it s|oulc i:clucc data histories s::i:g scvc:l ,c:s l: t|is :occss, it is
cvis|lc to ccii:c cutoff dates u to w|ic| |:|s c: cvlutc :c c:tc: t|c
vil|lc i:io:utio: i: t|c :cscctivc ct |isto:,
|:t !0 :cti:g Dt listo:, oi lc scs
lo: bad cases, t|c tiuc oi cciult :oviccs :tu:l oi:t oi :cic:c:cc o:
t|c |sis oi w|ic| t|c cutoii ctcs i: t|c ct |isto:, c: |c ccii:cc I|c i:tc:
vl sclcctcc io: t|c ct |isto:ics will ccc:c o: t|c ccsi:cc io:ccsti:g |o:i
zo: l: gc:c:l, o:c,c: cciult :o||ilit, is to |c cstiutcc, uc:i:g t|t
t|c cutoii ctcs s|oulc |c sct t 1!uo:t| i:tc:vls lowcvc:, t|c :ti:g uoccl
c: lso |c cli|:tcc io: lo:gc: io:ccsti:g c:iocs I|is :occcu:c is illus
t:tcc i: c|:t !0 o: t|c |sis oi 1!uo:t| i:tc:vls
Good cases :cic: to |o::owc:s io: w|ou :o cciult |s |cc: o|sc:vcc u to
t|c tiuc oi ct collcctio: I|is uc:s t|t :o :tu:l :cic:c:cc tiuc is vil
|lc s |sis io: ccii:i:g t|c st:ti:g oi:t oi t|c ct |isto:, lowcvc:, it is
:cccss:, to c:su:c t|t t|csc cscs :c i:cccc gooc cscs, t|t is, t|t t|c, co
:ot cciult wit|i: t|c io:ccsti:g |o:izo: itc: t|c i:io:utio: is c:tc:cc lo:
gooc cscs, t|c:cio:c, it is o:l, ossi|lc to usc i:io:utio: w|ic| ws vil|lc
wit|i: t|c |:| t lcst 1! uo:t|s |cio:c ct collcctio: |cg: ; 1st cutoii
ctc io: gooc cscs, :l, i: t|is w, is it ossi|lc to c:su:c t|t :o c:ccit
cciult |s occu::cc ;o: will occu:, ovc: t|c io:ccsti:g c:ioc A:logous
:i:cilcs l, to io:ccsti:g c:iocs oi uo:c t|: 1! uo:t|s li t|c i:tc:vl
|ctwcc: t|c tiuc w|c: t|c i:io:utio: |ccoucs vil|lc :c t|c st:t oi ct
collcctio: is s|o:tc: t|: t|c ccii:cc io:ccsti:g |o:izo:, t|c uost :ccc:tl,
vil|lc i:io:utio: c::ot |c uscc i: t|c :l,sis
li dynamic indicators ;ic i:cicto:s w|ic| ucsu:c c|:gcs ovc: tiuc, :c to
|c ccii:cc i: :ti:g uoccl ccvclouc:t, qu:tittivc i:io:utio: o: t lcst
two succcssivc :c vi|lc cutoii ctcs |vc to |c vil|lc wit| t|c co::cso:c
i:g tiuc i:tc:vl
W|c: ct :c couilcc i:ou v:ious i:io:utio: ctcgo:ics i: t|c ct
:cco:c io: scciiic cutoii ctc, t|c tiucli:css oi t|c i:io:utio: u, v:,
lo: cxulc, |:| ccou:t ctivit, ct :c gc:c:ll, uo:c u to ctc t|: qul
ittivc i:io:utio: o: ::ul ii::cil sttcuc:t ct l: :ticul:, ::ul
ii::cil sttcuc:ts :c oitc: :ot vil|lc wit|i: t|c |:| u:til o to uo:t|s
itc: t|c |l:cc s|cct ctc
l: t|c o:g:iztio: oi cccc:t:lizcc ct collcctio:, it is iuo:t:t to ccii:c
i: cv:cc |ow u:, gooc :c |c cscs cc| |:| is to sul, io: cc| cutoii
ctc lo: t|is u:osc, it is :cccss:, to ccvclo st:i:gc:t ct collcctio:
:occss wit| cuc ttc:tio: to ossi|lc tiuc co:st:i:ts lt is :ot ossi|lc to
u|c gc:c:ll, vlic sttcuc:ts s to t|c tiuc :cqui:cc io: cccc:t:lizcc ct
collcctio: |ccusc t|c collcctio: c:ioc ccc:cs o: t|c t,c oi ct to |c col
lcctcc :c t|c :uu|c: oi |:|s :ticiti:g i: t|c ool I|c wo:|loc lccc
o: culo,ccs :cso:si|lc io: ct collcctio: lso l,s : cssc:til :olc i: t|is
co:tcxt l:ou :cticl cxc:ic:cc, |owcvc:, wc cstiutc t|t t|c collcctio: oi
qulittivc :c qu:tittivc ct i:ou 1.0 |:|s o: 1. cscs cc| ;wit| ct
|isto:, oi t lcst ! ,c:s, t|cs :oxiutcl, iou: uo:t|s
l: t|is co:tcxt, t|c ctul :occss oi collccti:g ct s|oulc |c civiccc i:to
scvc:l |loc|s, w|ic| :c i: tu:: su|civiccc i:to i:civicul stgcs A: cxulc
oi ct collcctio: :occss is s|ow: i: c|:t !1
|:t !1 lxulc oi Dt ollcctio: l:occss
lo: cc| |loc|, i:tc:iu o||cctivcs :c ccii:cc wit| :cg:c to t|c cscs
c:tc:cc, :c t|c cc:t:l :o|cct oiiicc uo:ito:s c|c:c:cc to t|csc o||cctivcs
I|is |loc||scc :oc| u|cs it ossi|lc to cctcct :c :cucc, c::o:s ;cg
iilu:c to c|c:c to :cqui:cc :oo:tio:s oi gooc :c |c cscs, t : c:l,
stgc At t|c c:c oi t|c ct collcctio: :occss, it is iuo:t:t to llow sui
iicic:t c:ioc oi tiuc io: t|c ;cx ost, collcctio: oi ccitio:l cscs :cqui:cc
A:ot|c: succcss icto: i: cccc:t:lizcc ct collcctio: is t|c co:st:t vil
|ilit, oi |otli:c cu:i:g t|c ct collcctio: :occss l:tc:sivc suo:t io: :
tici:ts i: t|c :occss will u|c it ossi|lc to |:clc ct collcctio: :o|lcus
t i:civicul |:|s i: tiucl, u::c: I|is ucsu:c c: lso sc:vc to ccclc:tc
t|c ct collcctio: :occss \o:covc:, iccc|c| i:ou t|c |:|s to t|c cc:t:l
|otli:c c: lso c:|lc t|c cc:t:l :o|cct oiiicc to icc:tii, i:cquc:tl, c:cou:
tc:cc :o|lcus quic|l, I|c oiiicc c: t|c: ss t|c co::cso:ci:g solutio:s o:
to ll :ticiti:g |:|s i: o:cc: to c:su:c u:iio:u u:cc:st:ci:g :c t|c
co:sistc:tl, |ig| qulit, oi t|c ct collcctcc
Data Pooling Decentralized Data Collection Process
lt is :ot ossi|lc to :cvc:t c::o:s i: ct collcctio: i: cccc:t:lizcc collcctio:
:occsscs, cvc: ii cou:c|c:sivc |usi:css|scc usc:`s u:ul :c |otli:c
:c :oviccc lo: t|is :cso:, it is :cccss:, to i:clucc stgcs io: tcsti:g :c
c|cc|i:g ct i: cc| ct collcctio: |loc| ;scc c|:t !1, I|c qulit, ssu::cc
c,clc is illust:tcc i: cctil i: c|:t !!
I|c o||cctivcs oi t|c qulit, ssu::cc c,clc :c s iollows
to voic s,stcutic :c ::cou c:t:, c::o:s
to c:su:c t|t ct |isto:ics :c ccictcc :oc:l,
to c:su:c t|t ct :c c:tc:cc i: u:iio:u u::c:
to uo:ito: t|c :cqui:cc :oo:tio:s oi gooc :c |c cscs
|:t !! Dt ollcctio: :c lc:si:g l:occss i: Dt looli:g olutio:s
Wit|i: t|c quality assurance model :csc:tcc |c:c, t|c |:|s co:t:i|uti:g to
t|c ct ool cc| c:tc: t|c ct ccii:cc i: t|c Dt kcqui:cuc:ts :c Dt
ou:ccs stgc i:ccc:cc:tl, I|c |:|s t|c: su|uit t|ci: ct to cc:t:l :o|
cct oiiicc, w|ic| is :cso:si|lc io: uo:ito:i:g t|c tiucl, cclivc:, oi ct s wcll
s c:io:ui:g ct lusi|ilit, c|cc|s llusi|ilit, c|cc|s |cl to c:su:c u:i
io:u ct qulit, s c:l, s t|c ct c:t:, stgc lo: t|is u:osc, it is :cccss:,
to ccvclo lusi|ilit, tcsts io: t|c u:osc oi c|cc|i:g t|c ct collcctcc
l: t|csc plausibility tests, t|c itcus to |c :cvicwcc i:clucc t|c iollowi:g
Docs t|c |o::owc: c:tc:cc |clo:g to t|c :clcv:t :ti:g scguc:t
Wc:c t|c st:uctu:l c|:ctc:istics io: vc:ii,i:g :c:csc:ttivit, c:tc:cc
Ws t|c ct |isto:, c:ctcc cco:ci:g to its o:igi:l co:cctio:
lvc ll :cqui:cc ct iiclcs |cc: c:tc:cc
A:c t|c ct c:tc:cc co::cctl, ;i:cluci:g :cvicw oi ccii:cc :cltio:s|is
|ctwcc: ositio:s i: ::ul ii::cil sttcuc:ts, cg sscts ~ li|ilitics,
Dcc:ci:g o: t|c :ti:g scguc:ts i:volvcc, ccitio:l lusi|ilit, tcsts
s|oulc |c ccvclocc io: s u:, i:io:utio: ctcgo:ics s ossi|lc
llusi|ilit, tcsts s|oulc |c utoutcc, :c t|c :csults s|oulc |c :cco:ccc i:
test log ;scc c|:t !!,
|:t !! ulc Icst log
I|c cc:t:l :o|cct oiiicc s|oulc :ctu:: t|c tcst log :outl, so t|t t|c
|:| c: sc:c| io: :c co::cct :, c::o:s :cc t|c ct |vc |cc: co::cctcc,
t|c, c: |c :ctu::cc to t|c :o|cct oiiicc :c u:cc:go t|c ct clc:si:g c,clc
o:cc gi:
Data Pooling Centralized Data Collection Process
:cc t|c cccc:t:lizcc ct collcctio: :c clc:si:g stgcs :c coulctcc, it is
:cccss:, to c:ctc cc:t:l analysis database :c to c:io:u ii:l qulit,
c|cc| I|c stcs i: t|is :occss :c s|ow: i: c|:t !+
l: t|c ii:st stc, it is :cccss:, to cxt:ct t|c ct i:ou t|c |:|s` ct c:t:,
tools :c uc:gc t|cu i: : ovc:ll ct|sc
I|c scco:c stc i:volvcs t|c ii:l ct clc:si:g :occss io: t|is ct|sc
I|c ii:st su|stc oi t|is :occss sc:vcs to c:su:c ct i:tcg:it, I|is is co:c
usi:g ct uoccl w|ic| ccii:cs t|c :cltio:s|is |ctwcc: t|c ct clcuc:ts l:
t|is co:tcxt, i:civicul |:|s u, |vc violtcc i:tcg:it, co:citio:s i: t|c
cou:sc oi cccc:t:lizcc ct collcctio: I|c ct :cco:cs io: w|ic| t|csc co:
citio:s c::ot |c uct :c to |c cclctcc i:ou t|c ct|sc lxulcs oi ossi|lc
i:tcg:it, c|cc|s i:clucc t|c iollowi:g
|:t !+ :cti:g t|c A:l,sis Dt|sc :c li:l Dt lc:si:g
Wc:c |l:cc s|ccts c:tc:cc w|ic| c::ot |c ssig:cc to : cxisti:g |o:
:owc:
ls t|c:c qulittivc i:io:utio: w|ic| c::ot |c ssig:cc to cutoii ctc
lvc ciiic:c:t |o::owc:s |cc: c:tc:cc wit| t|c suc |o::owc: :uu|c:
lvc ciiic:c:t |:|s |cc: c:tc:cc u:cc: t|c suc |:| icc:tiiic: cocc
lvc :, |:|s |cc: c:tc:cc io: w|ic| :o |o::owc:s cxist
:cc ct i:tcg:it, |s |cc: c:su:cc, ll oi t|c :cui:i:g cscs s|oulc |c
c|cc|cc o:cc gi: usi:g t|c lusi|ilit, tcsts ccvclocc io: cccc:t:lizcc ct
collcctio: I|is sc:vcs to c:su:c t|t ll oi t|c ct iou:c i: t|c :l,sis ct
|sc :c scu:ticll, co::cct l: o:cc: to voic :ccuci:g t|c sizc oi t|c ct sct
uo:c t|: :cccss:,, it is cvis|lc to co::cct :t|c: t|: cclctc ct :cco:cs
w|c:cvc: ossi|lc
l: o:cc: to c:|lc |:|s to c:tc: iuo:t:t :otcs o: t|c usc oi ct
:cco:c, t|c ct s|oulc lso i:clucc : ccitio:l iiclc io: :cu:|s I|csc
:cu:|s :c to |c vicwcc :c cvlutcc i: t|c ct collcctio: :occss l: i:ci
vicul cscs, it will t|c: |c :cccss:, to cccicc w|ct|c: t|c :cu:|s |vc :
ciicct o: t|c usc oi csc o: :ot
lo: i:io:utio: o: ccli:g wit| uissi:g vlucs, lcsc :cic: to scctio: .!1
I|c cou|i:tio: oi cccc:t:lizcc :c cc:t:lizcc ct clc:si:g c:su:cs
|ig| lcvcl oi data quality i: ct ooli:g solutio:s I|is is iu:cuc:tl :c
:cquisitc io: ccvcloi:g uc:i:giul sttisticl uoccls
Data Pooling in the Validation and Ongoing Development
of Rating Models
li ct ool ws uscc to ccvclo :ti:g uoccl, it is :cccss:, to c:su:c t|t
cccc:t:lizcc ct collcctio: ;i: couli:cc wit| t|c |ig| :cqui:cuc:ts oi t|c
:ti:g ccvclouc:t :occss, lso co:ti:ucs i:to t|c :ti:g vlictio: :c o:go
i:g ccvclouc:t stgcs lowcvc:, ct ooli:g i: t|c vlictio: :c co:ti:ucc
ccvclouc:t oi :ti:g uoccls is usull, lcss cou:c|c:sivc, s i: t|is csc it is
o:l, :cccss:, to :ct:icvc t|c :ti:g c:itc:i w|ic| :c ctull, uscc lowcvc:,
ccitio:l ct :cqui:cuc:ts u, :isc io: :, :cccss:, iu:t|c: ccvclouc:ts
i: t|c ool|scc :ti:g uoccl
5.1.3 Definition of the Sample
I|c ct gt|c:cc i: t|c ct collcctio: :c clc:si:g stgcs :c:csc:t t|c ovc:
ll sulc, w|ic| |s to |c civiccc i:to : :l,sis sulc :c vlictio: su
lc I|c :l,sis sulc suo:ts t|c ctul ccvclouc:t oi t|c sco:i:g iu:c
tio:s, w|ilc t|c vlictio: sulc sc:vcs cxclusivcl, s |olcout sulc to tcst
t|c sco:i:g iu:ctio:s itc: ccvclouc:t l: gc:c:l, o:c c: cxcct sou:c cis
c:iui:to:, owc: i:ou t|c ct :cco:cs uscc io: ccvclouc:t Icsti:g t|c
uoccl`s lic|ilit, to :cw ;ic gc:c:ll, u:|:ow:, ct is t|us t|c |sic :c
:cquisitc io: t|c :ccog:itio: oi :, clssiiictio: :occcu:c l: t|is co:tcxt, it is
ossi|lc to civicc t|c ovc:ll sulc i:to t|c :l,sis :c vlictio: sulcs i:
two ciiic:c:t w,s
Actul civisio: oi t|c ct|sc i:to t|c :l,sis :c vlictio: sulcs
Alictio: oi |ootst: :occcu:c
l: cscs w|c:c suiiicic:t ct ;csccill, :cg:ci:g |c cscs, :c vil|lc to
c:|lc ctul civisio: i:to two suiiicic:tl, l:gc su|sulcs, t|c ii:st otio:
s|oulc |c :cic::cc I|is c:su:cs t|c st:ict sc:tio: oi t|c ct :cco:cs i:
t|c :l,sis :c vlictio: sulcs l: t|is w,, it is ossi|lc to c|cc| t|c qulit,
oi t|c sco:i:g iu:ctio:s ;ccvclocc usi:g t|c :l,sis sulc, usi:g t|c
u:|:ow: ct :cco:cs i: t|c vlictio: sulc
l: o:cc: to voic |is cuc to su||cctivc civisio:, t|c sulc s|oulc |c slit
u |, ::cou sclcctio: ;scc c|:t !., l: t|is :occss, |owcvc:, it is :cccss:,
to c:su:c t|t t|c ct :c :c:csc:ttivc i: tc:us oi t|ci: ccii:cc st:uctu:l
c|:ctc:istics ;scc scctio: .1!,
:l, t|osc cscs w|ic| iuliill cc:ti: ui:iuuu ct qulit, :cqui:cuc:ts
c: |c uscc i: t|c :l,sis sulc l: gc:c:l, t|is is l:cc, c:su:cc cu:i:g
t|c ct collcctio: :c clc:si:g stgc l: cscs w|c:c qulit, v:ics wit|i:
ct|sc, t|c |ig|c:qulit, ct s|oulc |c uscc i: t|c :l,sis sulc l: suc|
cscs, |owcvc:, t|c :csults o|ti:cc usi:g t|c vlictio: sulc will |c co:sic
c:|l, lcss :cli|lc
lo::owc:s i:cluccc i: t|c :l,sis sulc uust :ot |c uscc i: t|c vlictio:
sulc, cvc: ii ciiic:c:t cutoii ctcs :c uscc I|c :l,sis :c vlictio: su
lcs t|us |vc to |c cis|u:ct wit| :cg:c to |o::owc:s
Wit| :cg:c to wcig|ti:g gooc :c |c cscs i: t|c :l,sis sulc, two cii
ic:c:t :occcu:cs :c co:cciv|lc
I|c :l,sis sulc c: |c c:ctcc i: suc| w, t|t t|c :oo:tio: oi |c
cscs is :c:csc:ttivc oi t|c :ti:g scguc:t to |c :l,zcc l: t|is csc, cl
i|:ti:g t|c sco:i:g iu:ctio: |ccoucs csic: ;ci scctio: .!, lo: cxulc,
t|c :csult oi logistic :cg:cssio: c: |c uscc ci:cctl, s :o||ilit, oi
cciult ;lD, wit|out iu:t|c: :occssi:g o: :cscli:g I|is :oc| is cvis
|lc w|c:cvc: t|c :uu|c: oi cscs is :ot su||cct to :cst:ictio:s i: t|c ct
collcctio: stgc, :c csccill, w|c: suiiicic:t :uu|c: oi |c cscs c: |c
collcctcc
|:t !. :cti:g t|c A:l,sis :c Vlictio: ulcs
li :cst:ictio:s l, to t|c :uu|c: oi cscs w|ic| |:|s c: collcct i: t|c
ct collcctio: stgc, |ig|c: :oo:tio: oi |c cscs s|oulc |c collcctcc
l: :cticc, :oxiutcl, o:c iou:t| to o:c t|i:c oi t|c :l,sis sulc
cou:iscs |c cscs I|c ctul ccii:itio: oi t|csc :oo:tio:s ccc:cs
o: t|c vil|ilit, oi ct i: :ti:g ccvclouc:t I|is |s t|c cv:tgc
oi uxiuizi:g t|c :cli|ilit, wit| w|ic| t|c sttisticl :occcu:c c: icc:
tii, t|c ciiic:c:ccs |ctwcc: gooc :c |c |o::owc:s, cvc: io: sull qu:
titics oi ct lowcvc:, t|is :oc| lso :cqui:cs t|c cli|:tio: :c
:cscli:g oi clcultcc cciult :o||ilitics ;ci scctio: .!,
As : ltc::tivc o: sulcuc:t to slitti:g t|c ovc:ll sulc, t|c boot-
strap method (resampling) c: lso |c licc I|is uct|oc :oviccs w, oi
usi:g t|c c:ti:c ct|sc io: ccvclouc:t :c t t|c suc tiuc c:su:i:g t|c
:cli|lc vlictio: oi sco:i:g iu:ctio:s
l: t|c |ootst: uct|oc, t|c ovc:ll sco:i:g iu:ctio: is ccvclocc usi:g t|c
c:ti:c sulc wit|out su|civici:g it lo: t|c u:osc oi vlicti:g t|is sco:i:g
iu:ctio:, t|c ovc:ll sulc is civiccc scvc:l tiucs i:to i:s oi :l,sis :c
vlictio: sulcs I|c lloctio: oi cscs to t|csc su|sulcs is ::cou
I|c cociiicic:ts oi t|c icto:s i: t|c sco:i:g iu:ctio: :c cc| clcultcc
gi: usi:g t|c :l,sis sulc i: u::c: :logous to t|t uscc io: t|c ovc:ll
sco:i:g iu:ctio: \csu:i:g t|c iluctutio: u:gi:s oi t|c cociiicic:ts :csulti:g
i:ou t|c tcst sco:i:g iu:ctio:s i: cou:iso: to t|c ovc:ll sco:i:g iu:ctio:
u|cs it ossi|lc to c|cc| t|c st|ilit, oi t|c sco:i:g iu:ctio:
I|c :csulti:g cisc:iui:to:, owc: oi t|c tcst sco:i:g iu:ctio:s is cctc:
ui:cc usi:g t|c vlictio: sulcs I|c uc: :c iluctutio: u:gi: oi t|c
:csulti:g cisc:iui:to:, owc: vlucs :c li|cwisc t|c: i:to ccou:t :c sc:vc
s i:cicto:s oi t|c ovc:ll sco:i:g iu:ctio:`s cisc:iui:to:, owc: io: u:|:ow:
ct, w|ic| c::ot |c cctc:ui:cc ci:cctl,
l: cscs w|c:c ct vil|ilit, is low, t|c |ootst: uct|oc :oviccs :
ltc::tivc to ctull, civici:g t|c sulc Alt|oug| t|is uct|oc cocs :ot
i:clucc outoisulc vlictio:, it is sttisticll, vlic i:st:uuc:t w|ic| c:
|lcs t|c otiul usc oi t|c i:io:utio: co:ti:cc i: t|c ct wit|out :cglccti:g
t|c :ccc to vlictc t|c uoccl wit| u:|:ow: ct
l: t|is co:tcxt, |owcvc:, it is :cccss:, to :otc t|t cxccssivcl, l:gc iluc
tutio:s csccill, c|:gcs i: t|c sig: oi cociiicic:ts :c i:vc:sio:s oi |ig| :c
low cociiicic:ts i: t|c tcst sco:i:g iu:ctio:s i:cictc t|t t|c sulc uscc is
too sull io: sttisticl :ti:g ccvclouc:t l: suc| cscs, |ig|l, i:|ouogc:c
ous ct qu:titics :c gc:c:tcc i: t|c :cctcc ::cou civisio: oi t|c ovc:ll
sulc i:to :l,sis :c vlictio: sulcs, w|ic| uc:s t|t vlic uoccl c:
:ot |c ccvclocc o: t|c |sis oi t|c givc: sulc
5.2 Developing the Scoring Function
|:t !o co:i:g lu:ctio: Dcvclouc:t l:occcu:c
:cc qulit,ssu:cc ct sct |s |cc: gc:c:tcc :c t|c :l,sis :c vl
ictio: sulcs |vc |cc: ccii:cc, t|c ctul ccvclouc:t oi t|c sco:i:g iu:c
tio: c: |cgi: l: t|is cocuuc:t, sco:i:g iu:ctio: :cic:s to t|c co:c clcu
ltio: couo:c:t i: t|c :ti:g uoccl :o cisti:ctio: is c:w: i: t|is co:tcxt
|ctwcc: :ti:g :c sco:i:g uoccls io: c:ccit sscssuc:t ;ci i:t:ocuctio: to
c|tc: !,
I|c ccvclouc:t oi t|c sco:i:g iu:ctio: is gc:c:ll, civiccc i:to t|:cc
stgcs, w|ic| i: tu:: :c civiccc i:to i:civicul stcs l: t|is co:tcxt, wc
cxli: t|c iu:cuc:tl :occcu:c o: t|c |sis oi : :c|itcctu:c w|ic|
i:cluccs :til sco:i:g iu:ctio:s io: qu:tittivc s wcll s qulittivc ct
;scc c|:t !o,
I|c i:civicul stcs lcci:g to t|c ovc:ll sco:i:g iu:ctio: :c vc:, siuil:
io: qu:tittivc :c qulittivc ct lo: t|is :cso:, cctilcc ccsc:itio:s oi t|c
i:civicul stcs :c |scc o:l, o: qu:tittivc ct i: o:cc: to voic :cctitio:
I|c :occcu:c is ccsc:i|cc io: qulittivc ct o:l, i: t|c csc oi sccil c|:
ctc:istics
5.2.1 Univariate Analyses
I|c u:osc oi u:iv:itc :l,scs is to icc:tii, c:ccitwo:t|i:css c|:ctc:istics
w|ic| u|c sc:sc i: t|c |usi:css co:tcxt, c: |c su:vc,cc wit| souc csc, :c
s|ow |ig| cisc:iui:to:, owc: io: t|c u:osc oi ccvcloi:g t|c sco:i:g iu:c
tio: I|c :csult oi t|csc :l,scs is s|o:tlist oi iu:cuc:tll, suit|lc c:ccit
wo:t|i:css c|:ctc:istics l:csclccti:g c:ccitwo:t|i:css c|:ctc:istics :ccuccs
t|c coulcxit, oi t|c c:sui:g uultiv:itc :l,scs, t|us icilitti:g t|c :occss
su|st:till,
I|c stcs s|ow: i: c|:t !o :c ccsc:i|cc i: cctil |clow io: qu:tittivc
ct ;cg i:ou |l:cc s|cct :l,sis,
Developing a Catalog of Indicators
I|c ii:st stc is to ccvclo cou:c|c:sivc ctlog oi i:cicto:s o: t|c |sis oi
t|c qu:tittivc ct i:ou t|c ct collcctio: :occss I|is ctlog s|oulc
i:clucc i:cicto:s i:ou ll |usi:css:cltcc i:io:utio: ctcgo:ics w|ic| c:
suo:t t|c sscssuc:t oi |o::owc:`s situtio: i: tc:us oi sscts, ii::ccs,
:c i:couc I|csc i:io:utio: ctcgo:ics cctc:ui:c t|c st:uctu:c oi t|c
ctlog oi i:cicto:s I|c i:cicto:s ccii:cc io: cc| i:io:utio: ctcgo:,
s|oulc c:su:c t|t cou:c|c:sivc sscssuc:t oi t|c :c is ossi|lc :c t|t
ciiic:c:t sccts oi cc| :c :c covc:cc lo: t|c u:osc oi sscssi:g i:civic
ul sccts, i:cicto:s c: |c i:cluccc i: ciiic:c:t v:i:ts w|ic| u, :ovc to
|c uo:c o: lcss suit|lc i: t|c u:iv:itc :c uultiv:itc :l,scs lo: t|is
:cso:, vc:, l:gc :uu|c: oi i:cicto:s :c i: souc cscs vc:, siuil: i:ci
cto:s :c ccii:cc i: o:cc: to c:|lc t|c |cst v:i:ts to |c sclcctcc ltc: i:
t|c :occss
A:ot|c: co:citio: w|ic| i:cicto:s |vc to iuliill is t|t it uust |c ossi|lc
to clcultc t|cu io: ll oi t|c cscs i:cluccc i: scguc:t I|is ccsc:vcs sccil
ttc:tio: i: cscs w|c:c :ti:g scguc:t co:ti:s cou:ics to w|ic| siuli
iicc ccou:ti:g st:c:cs l, :c io: w|ic| :ot ll |l:cc s|cct itcus :c
vil|lc
l: :cticc, i:cicto:s :c usull, ccii:cc i: two stcs
1 l: t|c ii:st stc, t|c qu:tittivc ct itcus :c cou|i:cc to io:u indicator
components I|csc i:cicto: couo:c:ts cou|i:c t|c :uuc:ous itcus i:to
suus w|ic| :c uc:i:giul i: |usi:css tc:us :c t|us c:|lc t|c i:io:u
tio: to |c st:uctu:cc i: u::c: :o:itc io: cco:ouic :l,sis low
cvc:, t|csc |solutc i:cicto:s :c :ot uc:i:giul o: t|ci: ow:
! l: o:cc: to c:|lc cou:iso:s oi |o::owc:s, t|c scco:c stc clls io: t|c
ccii:itio: oi relative indicators cuc to v:,i:g sizcs Dcc:ci:g o: t|c t,c oi
ccii:itio:, cisti:ctio: is ucc |ctwcc: co:st:uctio:l iigu:cs, :cltivc iig
u:cs, :c i:ccx iigu:cs
.1
lo: cc| i:cicto:, it is :cccss:, to ostultc working hypothesis w|ic|
ccsc:i|cs t|c sig:iiic:cc oi t|c i:cicto: i: |usi:css tc:us lo: cxulc, t|c
wo:|i:g |,ot|csis G ~l uc:s t|t t|c i:cicto: will s|ow |ig|c: vc:gc
vluc io: gooc cou:ics t|: io: bc cou:ics :l, t|osc i:cicto:s io:
w|ic| clc: :c u:uist||lc wo:|i:g |,ot|csis c: |c givc: :c usciul i:
ccvcloi:g :ti:g I|c u:iv:itc :l,scs sc:vc to vc:ii, w|ct|c: t|c :c
suucc |,ot|csis g:ccs wit| t|c cui:icl vlucs
l: t|is co:tcxt, it is :cccss:, to :otc t|t t|c cxistc:cc oi monotonic
working hypothesis is c:ucil :c:cquisitc io: ll oi t|c sttisticl :ti:g uoccls
:csc:tcc i: c|tc: ! ;wit| t|c cxcctio: oi :tiiicil :cu:l :ctwo:|s, l:
o:cc: to usc i:cicto:s w|ic| co:io:u to :o:uo:oto:ic wo:|i:g |,ot|cscs
suc| s :cvc:uc g:owt| ;vc:gc g:owt| is uo:c ivo:|lc t|: low o: cxccs
sivcl, |ig| g:owt|,, it is :cccss:, to t::sio:u t|csc |,ot|cscs i: suc|
w, t|t t|c, ccsc:i|c uo:oto:ic co::cctio: |ctwcc: t|c t::sio:ucc i:ci
cto:`s vluc :c c:ccitwo:t|i:css o: t|c :o||ilit, oi cciult I|c t::sio:u
tio: to cciult :o||ilitics ccsc:i|cc |clow is o:c ossi|lc uc:s oi c|icvi:g
t|is c:c
Analyzing Indicators for Hypothesis Violations
I|c :occss oi :l,zi:g i:cicto:s io: |,ot|csis violtio:s i:volvcs cxui:i:g
w|ct|c: t|c cui:icll, cctc:ui:cc :cltio:s|i co:ii:us t|c wo:|i:g |,ot|
csis :l, i: cscs w|c:c : i:cicto:`s wo:|i:g |,ot|csis c: |c co:ii:ucc
cui:icll, is it ossi|lc to usc t|c i:cicto: i: iu:t|c: :l,scs li t|is is :ot
t|c csc, t|c i:cicto: c::ot |c i:tc::ctcc i: uc:i:giul w, :c is t|us
u:suit|lc io: t|c ccvclouc:t oi :ti:g s,stcu w|ic| is cou:c|c:si|lc
:c lusi|lc i:ou |usi:css c:scctivc I|c wo:|i:g |,ot|cscs io:uultcc
io: i:cicto:s c: |c :l,zcc i: two ciiic:c:t w,s
I|c ii:st :oc| uscs measure of discriminatory power ;cg t|c lowc:stt
vluc
.!
, w|ic| is l:cc, clcultcc io: cc| i:cicto: i: t|c cou:sc oi u:iv:itc
:l,sis l: t|is co:tcxt, t|c lgo:it|u uscc io: clcultio: gc:c:ll, ssuucs
G ~l s t|c wo:|i:g |,ot|csis io: i:cicto:s
.!
li t|c :csulti:g cisc:iui:
to:, owc: vluc is ositivc, t|c i:cicto: lso suo:ts t|c cui:icl |,ot|csis
G ~l l: t|c csc oi :cgtivc cisc:iui:to:, owc: vlucs, t|c cui:icl
|,ot|csis is Gl li t|c sig: |cio:c t|c clcultcc cisc:iui:to:, owc: vluc
cocs :ot g:cc wit| t|t oi t|c wo:|i:g |,ot|csis, t|is is co:sicc:cc violtio:
oi t|c |,ot|csis :c t|c i:cicto: is cxcluccc i:ou iu:t|c: :l,scs I|c:cio:c,
51
For more information on defining indicators, see BAETGE, J./HEITMANN, C., Kennzahlen.
52
Powerstat (Gini coefficient, accuracy ratio) and alternative measures of discriminatory power are discussed in section 6.2.1.
53
In cases where the working hypothesis is G <B, the statements made further below are inverted.
: i:cicto: s|oulc o:l, |c uscc i: cscs w|c:c t|c cui:icl vluc oi t|c i:ci
cto: i: qucstio: g:ccs wit| t|c wo:|i:g |,ot|csis t lcst i: t|c :l,sis su
lc l: :cticc, wo:|i:g |,ot|cscs :c i:cquc:tl, tcstcc i: t|c :l,sis :c vl
ictio: sulcs s wcll s t|c ovc:ll sulc
:c ltc::tivc is to clcultc t|c medians oi cc| i:cicto: sc:tcl, io:
t|c gooc :c |c |o::owc: g:ous Givc: suiiicic:t qu:tit, oi ct, it is lso
ossi|lc to c:io:u t|is clcultio: sc:tcl, io: ll tiuc c:iocs o|sc:vcc
I|is :occss i:volvcs :cvicwi:g w|ct|c: t|c i:cicto:`s ucci: vlucs ciiic: sig
:iiic:tl, io: t|c gooc :c |c g:ous oi cscs :c co::cso:c to t|c wo:|i:g
|,ot|csis ;cg io: G~l t|c g:ou ucci: io: gooc cscs is g:ctc: t|: t|c
g:ou ucci: io: |c cscs, li t|is is :ot t|c csc, t|c i:cicto: is cxcluccc
i:ou iu:t|c: :l,scs
A:l,zi:g t|c l:cicto:s` Avil|ilit, :c Dcli:g wit| \issi:g Vlucs
I|c :l,sis oi : i:cicto:`s vil|ilit, i:volvcs cxui:i:g |ow oitc: :
i:cicto: c::ot |c clcultcc i: :cltio: to t|c ovc:ll sulc oi cscs Wc
c: cisti:guis| |ctwcc: two cscs i: w|ic| i:cicto:s c::ot |c clcultcc
I|c i:io:utio: :cccss:, to clcultc t|c i:cicto: is :ot vil|lc i: t|c
|:| |ccusc it c::ot |c cctc:ui:cc usi:g t|c |:|`s oc:tio:l :occsscs
o: lIlictio:s l: suc| cscs, it is :cccss:, to c|cc| w|ct|c: t|c usc oi
t|is i:cicto: is :clcv:t to c:ccit :ti:gs :c w|ct|c: it will |c ossi|lc to
collcct t|c :cccss:, i:io:utio: i: t|c iutu:c li t|is is :ot t|c csc, t|c
:ti:g uoccl c::ot i:clucc t|c i:cicto: i: uc:i:giul w,
I|c i:cicto: c::ot |c clcultcc |ccusc t|c cc:oui:to: is zc:o i: civi
sio: clcultio: I|is cocs :ot occu: vc:, i:cquc:tl, i: :cticc, s i:cic
to:s :c :cic:|l, ccii:cc i: suc| w, t|t t|is cocs :ot |c: i: uc:
i:giul ii::cil |sc vlucs
l: uultiv:itc :l,scs, |owcvc:, vluc uust |c vil|lc io: cc| i:cic
to: i: cc| csc to |c :occsscc, ot|c:wisc it is :ot ossi|lc to cctc:ui:c :t
i:g io: t|c csc lo: t|is :cso:, it is :cccss:, to |:clc uissi:g vlucs cco:c
i:gl, lt is gc:c:ll, :cccss:, to ccl wit| uissi:g vlucs |cio:c : i:cicto: is
t::sio:ucc
l: t|c :occss oi handling missing values, wc c: cisti:guis| |ctwcc: iou:
ossi|lc :oc|cs
! scs i: w|ic| : i:cicto: c::ot |c clcultcc :c cxcluccc i:ou t|c
ccvclouc:t sulc
+ l:cicto:s w|ic| co :ot tti: ui:iuuu lcvcl oi vil|ilit, :c cxcluccc
i:ou iu:t|c: :l,scs
. \issi:g i:cicto: vlucs :c i:cluccc s sc:tc ctcgo:, i: t|c :l,scs
o \issi:g vlucs :c :clccc wit| cstiutcc vlucs scciiic to cc| g:ou
Procedure (1) is oitc: iu:ctic|lc |ccusc it cxcluccs so u:, ct :cco:cs
i:ou :l,sis t|t t|c ct sct u, |c :c:cc:cc cui:icll, i:vlic
Procedure (2) is :ovc: uct|oc oi ccli:g wit| i:cicto:s w|ic| :c ciiii
cult to clcultc I|c lowc: t|c i:ctio: oi vlic vlucs io: : i:cicto: i: su
lc, t|c lcss suit|lc t|c i:cicto: is io: t|c ccvclouc:t oi :ti:g |ccusc its
vluc |s to |c cstiutcc io: l:gc :uu|c: oi cscs lo: t|is :cso:, it is :cc
css:, to ccii:c liuit u to w|ic| : i:cicto: is co:sicc:cc suit|lc io: :ti:g
ccvclouc:t i: tc:us oi vil|ilit, li : i:cicto: c: |c clcultcc i: lcss t|:
:oxiutcl, 0 oi cscs, it is :ot ossi|lc to c:su:c t|t uissi:g vlucs c:
|c |:clcc i: sttisticll, vlic u::c:
.+
l: suc| cscs, t|c i:cicto: |s to |c
cxcluccc i:ou t|c :l,sis
Procedure (3) is vc:, ciiiicult to l, i: t|c ccvclouc:t oi sco:i:g iu:c
tio:s io: qu:tittivc ct, s uissi:g vluc cocs :ot co:stitutc i:ccc:cc:t
i:io:utio: lowcvc:, io: qulittivc ct it is c:ti:cl, ossi|lc to usc uissi:g
vlucs s sc:tc ctcgo:, i: t|c ccvclouc:t oi sco:i:g iu:ctio:s Duc to
t|c o:ci:l :tu:c oi t|is t,c oi ct, it is i:cccc ossi|lc to cctc:ui:c co:
:cctio: |ctwcc: vluc w|ic| c::ot |c cctc:ui:cc :c its ciiccts o: c:ccit
wo:t|i:css lo: t|is :cso:, l:occcu:c ;!, c: o:l, |c uscc succcssiull, i: t|c
csc oi qulittivc ct
lo: qu:tittivc :l,scs, Procedure (4) is suit|lc :c sttisticll, vlic :o
cccu:c io: |:cli:g uissi:g i:cicto: vlucs w|ic| :cc| t|c ui:iuuu su:vc,
|ilit, lcvcl oi 0 |ut :c :ot vlic i: ll cscs uit|lc g:ouscciiic csti
utcs i:clucc t|c ucci:s io: t|c g:ous oi gooc :c |c cscs I|c usc oi
g:ouscciiic vc:gcs is :ot s suit|lc |ccusc vc:gcs c: |c coui:tcc
|cvil, |, outlic:s wit|i: t|c g:ous G:ouscciiic cstiutcs :c cssc:til
i: t|c :l,sis sulc |ccusc t|c i:cicto:`s u:iv:itc cisc:iui:to:, owc:
c::ot |c :l,zcc otiull, i: t|c ovc:ll sco:i:g iu:ctio: wit|out suc|
g:oui:gs l: t|c vlictio: sulc, t|c ucci: oi t|c i:cicto: vluc io: ll
cscs is licc s t|c gc:c:l cstiutc
Estimate for analysis sample: c:tc ucci:s oi t|c i:cicto: io: gooc :c
|c cscs
Estimate for validation sample: \cci: oi t|c i:cicto: io: ll cscs
As t|c vlictio: sulc is i:tc:ccc to siuultc t|c ct to |c sscsscc wit|
t|c :ti:g uoccl i: t|c iutu:c, t|c co::cso:ci:g cstiutc cocs :ot ciiic:c:titc
|ctwcc: gooc :c |c cscs li g:ouscciiic cstiutc wc:c lso uscc |c:c,
t|c cisc:iui:to:, owc: oi t|c :csulti:g :ti:g uoccl coulc csil, |c ovc:cs
tiutcc usi:g u:|:ow: ct
I|c :csult oi t|c :occss oi |:cli:g uissi:g vlucs is ct|sc i: w|ic|
vlic vluc c: |c iou:c io: cc| s|o:tlistcc i:cicto: i: cc| csc I|is ct|sc
io:us t|c |sis io: uultiv:itc :l,scs i: t|c ccvclouc:t oi :til sco:i:g
iu:ctio:s io: qu:tittivc ct
Analysis of Univariate Discriminatory Power
l: o:cc: to |c uscc i: sttisticll, vlic u::c:, : i:cicto: |s to cx|i|it
cc:ti: lcvcl oi cisc:iui:to:, owc: i: t|c u:iv:itc co:tcxt lowcvc:, u:i
v:itc cisc:iui:to:, owc: o:l, sc:vcs s : i:cictio: t|t t|c i:cicto:
is suit|lc io: usc wit|i: :ti:g uoccl l:cicto:s w|ic| co :ot tti:
cisc:iui:to:, vluc w|ic| ciiic:s sig:iiic:tl, i:ou zc:o co :ot suo:t t|ci:
wo:|i:g |,ot|cscs :c s|oulc t|us |c cxcluccc i:ou t|c ii:l :ti:g uoccl
w|c:cvc: ossi|lc
l: :, csc, it is :cccss:, to c:io:u t|c :l,sis oi t|c i:cicto:s` u:iv:i
tc cisc:iui:to:, owc: |cio:c |:cli:g uissi:g vlucs :l, t|osc cscs
w|ic| :ctu:: vlic i:cicto: vlucs :ot t|osc wit| uissi:g o: i:vlic vlucs
s|oulc |c uscc i: t|c u:iv:itc cisc:iui:to:, owc: :l,scs
54
Cf. also HEITMANN, C., Neuro-Fuzzy, p. 139 f.; JERSCHENSKY, A., Messung des Bonittsrisikos von Unternehmen, p. 137;
THUN, C., Entwicklung von Bilanzbonittsklassifikatoren, p. 135.
Transformation of Indicators
l: o:cc: to u|c it csic: to cou:c :c :occss t|c v:ious i:cicto:s i:
uultiv:itc :l,scs, it is cvis|lc to t::sio:u t|c i:cicto:s usi:g u:iio:u
sclc Duc to t|c wicc v:ict, oi i:cicto: ccii:itio:s uscc, t|c i:cicto:s will
|c c|:ctc:izcc |, ciiic:i:g vluc ::gcs W|ilc t|c vlucs io: co:st:uctio:l
iigu:c gc:c:ll, ill wit|i: t|c ::gc 0. 1, s i: t|c csc oi cxc:sc :tcs, :cl
tivc iigu:cs :c sclcou :cst:ictcc to :cccii:cc vluc i:tc:vls :c c: lso |c
:cgtivc I|c |cst cxulc is :ctu:: o: cquit,, w|ic| c: t|c o: vc:, low
;cvc: :cgtivc, s wcll s vc:, |ig| vlucs I::sio:utio: st:c:cizcs t|c
vluc ::gcs io: t|c v:ious i:cicto:s usi:g u:iio:u sclc
:c t::sio:utio: couuo:l, uscc i: :cticc is t|c transformation of indi-
cators into probabilities of default (PD) l: t|is :occss, t|c vc:gc cciult :tcs
io: cis|u:ct i:tc:vls i: t|c i:cicto:s` vluc ::gcs :c cctc:ui:cc cui:icll,
io: t|c givc: sulc lo: cc| oi t|csc i:tc:vls, t|c cciult :tc i: t|c sulc is
clcultcc I|c tiuc |o:izo: c|osc: io: t|c cciult :tc is gc:c:ll, t|c
i:tc:ccc io:ccsti:g |o:izo: oi t|c :ti:g uoccl I|c :occs clcultcc i: t|is
w, ;vc:gc i:cicto: vluc :c cciult :o||ilit, c: i:tc:vl, :c co::cctcc
|, :o:li:c: i:tc:oltio: I|c iollowi:g logistic iu:ctio: uig|t |c uscc io:
i:tc:oltio:
T1 |
n |
1 expaI b
.
l: t|is cqutio:, 1 :c T1 :c:csc:t t|c vlucs oi t|c u:t::sio:ucc :c
t::sio:ucc i:cicto:, :c o :c n :c:csc:t t|c uc: :c lowc: liuits oi t|c
t::sio:utio: I|c :uctc:s o :c / cctc:ui:c t|c stcc:css oi t|c cu:vc
:c t|c loctio: oi t|c i:ilcctio: oi:t I|c :uctc:s o, /, n, :c o |vc
to |c cctc:ui:cc |, :o:li:c: i:tc:oltio:
I|c :csult oi t|c t::sio:utio: ccsc:i|cc |ovc is t|c ssig:uc:t oi su
lc|scc cciult :o||ilit, to cc| ossi|lc i:cicto: vluc As t|c :csulti:g
cciult :o||ilitics lic wit|i: t|c ::gc n; o, outlic:s io: vc:, |ig| o: vc:,
low i:cicto: vlucs :c ciicctivcl, oiisct |, t|c s|cc cu:vc oi t|c i:tc:o
ltio: iu:ctio:
lt is iuo:t:t to i:vcstigtc |,ot|csis violtio:s usi:g t|c u:t::sio:ucc
i:cicto: |ccusc cvc:, i:cicto: will ucct t|c co:citio:s oi t|c wo:|i:g
|,ot|csis Gl itc: t::sio:utio: i:to cciult :o||ilit, I|is is lusi|lc
|ccusc t::sio:utio: i:to lD vlucs i:cictcs t|c :o||ilit, oi cciult o: t|c
|sis oi : i:cicto: vluc I|c lowc: t|c :o||ilit, oi cciult is, t|c |cttc:
t|c |o::owc: is
Analyzing Indicator Correlations
I|c :l,sis oi cc| i:cicto: io: |,ot|csis violtio:s, cisc:iui:to:, owc:
:c vil|ilit, c: sc:vc to :ccucc t|c sizc oi t|c i:cicto: ctlog su|st:till,
lowcvc:, t|c :cui:i:g i:cicto:s will s|ow uo:c o: lcss st:o:g siuil:itics o:
co::cltio:s l: gc:c:l, siuil: i:cicto:s ccict t|c suc i:io:utio: lo: t|is
:cso:, it is cv:tgcous to usc u:co::cltcc i:cicto:s w|c:cvc: ossi|lc
w|c: ccvcloi:g :ti:g uoccl, s t|is will c:su:c t|t t|c :ti:g :cilccts v:
ious i:io:utio: ctcgo:ics l: ccitio:, |ig| co::cltio:s c: lcc to st|ilit,
:o|lcus i: t|c cstiutio: oi cociiicic:ts io: t|c sco:i:g iu:ctio:s l: suc|
cscs, t|c cstiutio: lgo:it|u uscc will :ot |c |lc to u:iqucl, icc:tii, t|c
cociiicic:ts oi t|c li:c: cou|i:tio:s oi i:cicto:s I|c :clcv:t litc:tu:c cocs
:ot i:cictc :, |i:ci:g guiccli:cs io: t|c uxiuuu sizc oi co::cltio:s
|ctwcc: i:cicto:s As :ulc oi t|uu|, |owcvc:, i:s oi i:cicto:s w|ic| s|ow
co::cltio: cociiicic:ts g:ctc: t|: 0! s|oulc o:l, |c i:cluccc i: sco:i:g
iu:ctio:s wit| g:ct cutio:
:c tool w|ic| c: |c uscc to cxui:c i:cicto: co::cltio:s is hierarchical
cluster analysis
..
lic::c|icl clustc: :l,sis i:volvcs c:cti:g g:ous ;ic clus
tc:s, oi i:cicto:s w|ic| s|ow |ig| lcvcls oi co::cltio: wit|i: t|c clustc:s |ut
o:l, low lcvcls oi co::cltio: |ctwcc: t|c v:ious clustc:s
.o
I|osc i:cicto:s w|ic| :ctu:: |ig| lowc:stt vlucs :c sclcctcc i:ou t|c
clustc:s c:ctcc l:cicto:s w|ic| |vc vc:, siuil: ccii:itio:s ;cg v:ious
t,cs oi :ctu::, |ut io: w|ic| it is :ot ossi|lc to cccicc t t|c tiuc oi clustc:
:l,sis w|ic| v:i:t will |c uost suit|lc c: |c uscc i: :llcl i: uultiv:i
tc :l,sis lo: t|c s|c oi t|c uoccl`s st|ilit,, |owcvc:, it is cvis|lc to voic
i:cluci:g |ig|l, co::cltcc v:i|lcs i: t|c ii:l :ti:g uoccl
5.2.2 Multivariate Analysis
l:cicto: :csclcctio: ,iclcs s|o:tlist oi i:cicto:s, :c t|c o||cctivc oi uulti
v:itc :l,sis is to ccvclo sco:i:g iu:ctio: io: t|csc i:cicto:s l: t|is
scctio:, wc :csc:t sco:i:g iu:ctio: io: qu:tittivc ct I|c :occcu:c
io: ccvcloi:g sco:i:g iu:ctio:s io: qulittivc i:io:utio: ctcgo:ics is :lo
gous I|c ctlogs oi i:cicto:squcstio:s :ccuccc i: u:iv:itc :l,scs io:u
t|c |sis io: t|is ccvclouc:t :occss
l: :cticc, |:|s gc:c:ll, ccvclo uultilc sco:i:g iu:ctio:s i: :llcl
:c t|c: sclcct t|c iu:ctio: w|ic| is uost suit|lc io: t|c ovc:ll :ti:g uoccl
I|c iollowi:g gc:c:l :cqui:cuc:ts s|oulc |c iuoscc o: t|c ccvclouc:t oi
t|c sco:i:g iu:ctio:s
||cctivc i:cicto: sclcctio: |scc o: t|c cui:icl :occcu:c
Atti:uc:t oi |ig| cisc:iui:to:, owc:
lo: t|is u:osc, s icw i:cicto:s s ossi|lc s|oulc |c uscc i: o:cc: to
i:c:csc t|c st|ilit, oi t|c sco:i:g iu:ctio: :c to c:su:c : ciiicic:t :ti:g
:occcu:c
l:clusio: oi s u:, ciiic:c:t i:io:utio: ctcgo:ics s ossi|lc ;cg sscts
situtio:, ii::cil situtio:, i:couc situtio:,
lxlicit sclcctio: o: cxlicit cxclusio: oi cc:ti: i:cicto:s i: o:cc: to
c:|:cc o: llow sttcuc:ts w|ic| :c uc:i:giul i: |usi:css tc:us
: t|c |sis oi t|c s|o:tlist oi i:cicto:s, v:ious sco:i:g iu:ctio:s :c
t|c: cctc:ui:cc wit| ttc:tio: to t|c :cqui:cuc:ts listcc |ovc l:|s w|ic|
usc cisc:iui::t :l,scs o: :cg:cssio: uoccls c: cstiutc t|c i:cicto:s`
cociiicic:ts usi:g otiuiztio: lgo:it|us i:ou sttistics soitw:c :og:us
I|c sco:i:g iu:ctio:`s cociiicic:ts :c lw,s otiuizcc usi:g t|c ct i: t|c
:l,sis sulc I|c vlictio: sulc sc:vcs t|c cxclusivc u:osc oi tcsti:g
55
Cf. BACKHAUS ET AL., Multivariate Analysemethoden, chapter 6.
56
Rank order correlation (Spearman correlation) is an especially well suited measure of correlation in untransformed indicators.
In comparison to the more commonly used Pearson correlation, this method offers the advantage of performing calculations using
only the ranks of indicator values, not the indicator values themselves. Rank order correlation also delivers suitable results for
indicators which are not normally distributed and for small samples. For this reason, this method can be applied in particular to
indicators which are not uniformly scaled. Cf. SACHS, L., Angewandte Statistik, sections 5.2/5.3.
t|c sco:i:g iu:ctio:s ccvclocc usi:g t|c :l,sis sulc ;scc lso scctio:
.1!,
I|c ii:l sco:i:g iu:ctio: c: |c sclcctcc i:ou t|c |oc, oi vil|lc iu:c
tio:s cco:ci:g to t|c iollowi:g c:itc:i, w|ic| :c cxli:cc i: g:ctc: cctil
iu:t|c: |clow
|cc|i:g t|c sig:s oi cociiicic:ts
Disc:iui:to:, owc: oi t|c sco:i:g iu:ctio:
t|ilit, oi cisc:iui:to:, owc:
ig:iiic:cc oi i:civicul cociiicic:ts
ovc:gc oi :clcv:t i:io:utio: ctcgo:ics
Checking the Signs of Coefficients
I|c cociiicic:ts cctc:ui:cc i: t|c :occss oi ccvcloi:g t|c uoccl |vc to |c
i: li:c wit| t|c wo:|i:g |usi:css |,ot|cscs ostultcc io: t|c i:cicto:s
I|c:cio:c, i:cicto:s io: w|ic| t|c wo:|i:g |,ot|csis is G~l s|oulc |c i:ut
wit| ositivc sig:s, w|ilc i:cicto:s w|osc |,ot|cscs :c Gl s|oulc |c
c:tc:cc wit| :cgtivc sig:s ii l:gc: iu:ctio: vlucs :c to i:cictc |ig|c: lcvcls
oi c:ccitwo:t|i:css
.
l: cscs w|c:c t|is sig: :ulc is violtcc, it is :cccss:, to
cliui:tc t|c sco:i:g iu:ctio: |ccusc it c::ot |c i:tc::ctcc i: uc:i:giul
|usi:css tc:us I|is situtio: :iscs i:cquc:tl, i: t|c csc oi |ig|l, co::cltcc
i:cicto:s wit| u:st|lc cociiicic:ts lo: t|is :cso:, it is oitc: ossi|lc to :cu
cc, t|is c::o: |, c|:gi:g t|c i:cicto:s sclcctcc
li ll oi t|c i:cicto:s to |c i:cluccc i: t|c sco:i:g iu:ctio: |vc |cc: t::s
io:ucc i:to u:iio:u wo:|i:g |,ot|cscs ;cg |, t::sio:ui:g t|cu i:to
cciult :o||ilitics, ci scctio: .!1,, ll cociiicic:ts |vc to |c: t|c suc
sig:
Discriminatory Power of the Scoring Function
l: cscs w|c:c uultilc sco:i:g iu:ctio:s wit| lusi|lc cociiicic:ts :c vil
|lc, t|c cisc:iui:to:, owc: oi t|c sco:i:g iu:ctio:s io: t|c io:ccsti:g |o:i
zo: sc:vcs s t|c cccisivc c:itc:io: l: :cticc, cisc:iui:to:, owc: is i:c
quc:tl, ucsu:cc usi:g lowc:stt vlucs
.
Stability of Discriminatory Power
l: ccitio: to t|c lcvcl oi cisc:iui:to:, owc:, its st|ilit, is lso sig:iiic:t
icto: l: t|is co:tcxt, it is :cccss:, to ciiic:c:titc |ctwcc: t|c st|ilit, oi t|c
sco:i:g iu:ctio: w|c: licc to u:|:ow: ct ;outoisulc vlictio:, :c
its st|ilit, w|c: licc to lo:gc: io:ccsti:g |o:izo:s
co:i:g iu:ctio:s io: w|ic| cisc:iui:to:, owc: tu::s out to |c su|st:
till, lowc: io: t|c vlictio: sulc ;scc scctio: .1!, t|: io: t|c :l,sis
sulc :c lcss suit|lc io: usc i: :ti:g uoccls |ccusc t|c, iil w|c: licc
to u:|:ow: ct W|c: sclccti:g sco:i:g iu:ctio:s, t|c:cio:c, it is iuo:t:t
to ivo: t|osc iu:ctio:s w|ic| o:l, s|ow slig|t ccc:csc i: cisc:iui:to:,
owc: i: outoisulc vlictio: o: i: t|c clcultio: oi vc:gc cisc:i
ui:to:, owc: usi:g t|c |ootst: uct|oc l: gc:c:l, iu:t|c: ttcuts to
57
If higher function values imply lower creditworthiness, for example in the logistic regression results (which represent default
probabilities), the signs are reversed.
58
Powerstat (Gini coefficient, accuracy ratio) and alternative measures of discriminatory power are discussed in section 6.2.1.
otiuizc t|c uoccl s|oulc |c ucc i: cscs w|c:c t|c ciiic:c:cc i: cisc:iui
:to:, owc: |ctwcc: t|c :l,sis :c vlictio: sulcs cxccccs 10 s ucs
u:cc i: lowc:stt vlucs
\o:covc:, t|c st|ilit, oi cisc:iui:to:, owc: i: t|c :l,sis :c vlictio:
sulcs lso |s to |c cctc:ui:cc io: tiuc c:iocs ot|c: t|: t|c io:ccsti:g
|o:izo: uscc to ccvclo t|c uoccl uit|lc sco:i:g iu:ctio:s s|oulc s|ow
sou:c cisc:iui:to:, owc: io: io:ccsti:g |o:izo:s oi 1! uo:t|s s wcll s
lo:gc: c:iocs
Significance of Individual Coefficients
l: t|c otiuiztio: oi i:cicto: cociiicic:ts, sttisticl |,ot|csis i: t|c io:u
oi cociiicic:t 0 is ostultcc I|is |,ot|csis c: |c tcstcc usi:g t|c sig:iii
c:cc ucsu:cs ;cg lIcsts, :ocuccc |, uost otiuiztio: :og:us
.-
:
t|c |sis oi t|is i:io:utio:, it is lso ossi|lc to :clizc lgo:it|us io: uto
utic i:cicto: sclcctio: l: t|is co:tcxt, ll i:cicto:s w|osc otiuizcc coci
iicic:ts :c :ot cqul to zc:o t :cccii:cc lcvcl oi sig:iiic:cc :c sclcctcc
i:ou t|c sulc I|csc lgo:it|us :c gc:c:ll, i:cluccc i: soitw:c c|gcs
io: uultiv:itc :l,sis
o0
Coverage of Relevant Information Categories
A: iuo:t:t ccitio:l :cqui:cuc:t co:citio: i: t|c ccvclouc:t oi sco:i:g
iu:ctio:s is t|c covc:gc oi ll i:io:utio: ctcgo:ics ;w|c:c ossi|lc, I|is
c:su:cs t|t t|c :ti:g :c:csc:ts |olistic sscssuc:t oi t|c |o::owc:`s cco
:ouic situtio:
|oulc uultiv:itc :l,sis ,iclc uultilc sco:i:g iu:ctio:s w|ic| :c
cquivlc:t i: tc:us oi t|c c:itc:i ccsc:i|cc, t|c sco:i:g iu:ctio: w|ic| co:
ti:s t|c uost csil, u:cc:st:c|lc i:cicto:s s|oulc |c c|osc: I|is will lso
sc:vc to i:c:csc usc: ccct:cc
:cc t|c sco:i:g iu:ctio: |s |cc: sclcctcc, it is ossi|lc to sclc t|c sco:c
vlucs ;cg to ::gc oi 0 to 100, I|is c:|lcs :til sco:cs i:ou v:ious
i:io:utio: ctcgo:ics to |c :csc:tcc i: siulc: :c uo:c u:cc:st:c|lc
u::c:
5.2.3 Overall Scoring Function
li sc:tc :til sco:i:g iu:ctio:s :c ccvclocc io: qu:tittivc :c qulit
tivc ct, t|csc iu:ctio:s |vc to |c li:|cc i: t|c uoccl`s :c|itcctu:c to io:u
: ovc:ll sco:i:g iu:ctio: I|c o||cctivc i: t|is co:tcxt is to cctc:ui:c t|c
otiuuu wcig|ti:g oi t|c two ct t,cs
l: gc:c:l, t|c c:so:l t:its oi t|c |usi:css ow:c: o: u:gc: i:iluc:cc
t|c c:ccit qulit, oi c:tc::iscs i: sullc:sclc :ti:g scguc:ts uo:c |cvil,
t|: i: l:gc: cou:ics lo: t|is :cso:, wc c: o|sc:vc i: :cticc t|t t|c
i:iluc:cc oi qulittivc i:io:utio: ctcgo:ics o: cc| ovc:ll sco:i:g iu:ctio:
i:c:cscs s t|c sizc oi t|c c:tc::iscs i: t|c scguc:t ccc:cscs lowcvc:, t|c
wcig|ti:g s|ow: i: c|:t ! is o:l, to |c scc: s :oug| guiccli:c :c :ot s
|i:ci:g :cqui:cuc:t oi ll :ti:g uoccls suit|lc io: usc i: :cticc
59
Cf. (for example) SACHS, L., Angewandte Statistik, section 3.5.
60
e.g. SPSS.
|:t ! ig:iiic:cc oi Qu:tittivc :c Qulittivc Dt i: Diiic:c:t kti:g cguc:ts
l: i:civicul cscs, |:|s c: c|oosc v:ious :oc|cs to tti:i:g t|c
otiuuu wcig|ti:g oi :til sco:i:g iu:ctio:s i: tc:us oi cisc:iui:to:,
owc: I|csc :oc|cs i:clucc t|c iollowi:g
tiuiztio: usi:g uultiv:itc cisc:iui::t :l,sis
tiuiztio: usi:g :cg:cssio: uoccl
lu:cl, |cu:istic wcig|ti:g oi :til sco:i:g iu:ctio:s
ou|i:cc io:u lcu:istic ccii:itio: oi wcig|ts |scc o: sttisticl :csults
Dsi:g sttisticl uoccls oiic:s t|c cv:tgc oi llowi:g t|c |:| to cctc:
ui:c t|c otiuuu wcig|ti:g oi :til sco:cs o||cctivcl, wit| vicw to iu:ov
i:g cisc:iui:to:, owc:
As : ltc::tivc, it is ossi|lc to ssig: :cltivc wcig|ts to :til sco:i:g
iu:ctio:s cxclusivcl, o: t|c |sis oi cxc:t |ucguc:t I|is woulc |:i:g |out
|ig|c: lcvcl oi usc: ccct:cc, |ut it lso |s t|c ciscv:tgc oi otc:till,
|ig| losscs i: cisc:iui:to:, owc: cou:cc to t|c otiuuu lcvcl w|ic| c:
|c tti:cc usi:g sttisticl uct|ocs
I|c:cio:c, |,|:ic io:us w|ic| usc li:c: cou|i:tio: io: :til sco:i:g
iu:ctio:s :c couuo: i: :cticc lo: t|is u:osc, t|c lowc:stt vluc oi
t|c ovc:ll sco:i:g iu:ctio: io: |ot| t|c :l,sis :c vlictio: sulcs is cl
cultcc io: v:ious li:c: wcig|ti:g ossi|ilitics ;scc c|:t !, I|is u|cs it
ossi|lc to ccii:c ::gc io: ovc:ll sco:i:g iu:ctio:s wit| vc:, |ig| cisc:iu
i:to:, owc:
li:ll,, t|c oi:io:s oi c:ccit |usi:css :ctitio:c:s :c uscc to cctc:ui:c
t|c wcig|ti:g wit|i: t|c ::gc icc:tiiicc l: suuu:,, t|is :oc| oiic:s t|c
iollowi:g cv:tgcs
lt u|cs t|c i:iluc:cc oi qu:tittivc :c qulittivc ct o: t|c c:ccit :ti:g
t::s:c:t cuc to t|c usc oi li:c: wcig|ti:g
lt c:su:cs |ig| usc: ccct:cc cuc to t|c i:clusio: oi cxc:t oi:io:s
lt lso c:su:cs |ig| cisc:iui:to:, owc: cuc to t|c i:clusio: oi sttisticl
uct|ocs
|:t ! lxulc oi Wcig|ti:g tiuiztio: io: l:til co:i:g lu:ctio:s
5.3 Calibrating the Rating Model
I|c o||cctivc oi cli|:tio: is to ssig: default probability to cc| ossi|lc
ovc:ll sco:c, w|ic| u, |c g:cc o: ot|c: sco:c vluc I|c cciult :o||il
itics t|cusclvcs c: |c clssiiicc i:to s u:, s |out !0 rating classes, ui:l,
i: o:cc: to icilittc :co:ti:g Assig:i:g cciult :o||ilitics to :ti:g :csults is
c:ucil i: o:cc: to ucct t|c ui:iuuu :cqui:cuc:ts oi t|c lkl :oc| u:cc:
lscl ll :c t|c :ooscc lD ci:cctivc
o1
l: o:cc: to iuliill t|csc ui:iuuu :cqui:cuc:ts, t|c rating scale uscc |s to
i:clucc t lcst scvc: :ti:g clsscs ;ic g:ccs, io: :o:cciultcc |o::owc:s
:c o:c clss io: cciultcc |o::owc:s, cxcct i: t|c :ctil scguc:t
o!
l: :cticc, |:|s i:cquc:tl, usc w|t is :cic::cc to s master scale, t|t is,
u:iio:u :ti:g sclc w|ic| is uscc t|:oug|out t|c |:| :c i:to w|ic| ll :ti:g
:csults io: scguc:tscciiic :ti:g :occcu:cs :c ucc I|c cv:tgc oi t|is
:oc| is t|c :csulti:g cou:|ilit, oi :ti:g :csults c:oss ll :ti:g scguc:ts
As cc| scguc:t is c|:ctc:izcc |, scciiic ictu:cs, csccill, wit| :cg:c
to vc:gc cciult :o||ilit, :tcs, sc:tc scguc:tscciiic cli|:tio: is :cc
css:, io: cc| :ti:g uoccl l: t|c cli|:tio: :occss, t|c |:cwict| oi :ti:g
:csults ;cg sco:c vluc ::gcs, to |c ssig:cc to cc| :ti:g clss o: t|c ustc:
sclc is cctc:ui:cc ;scc c|:t !-, Wit| :cg:c to uoccl t,cs, t|c iollowi:g
icto:s :c to |c ciiic:c:titcc i: cli|:tio:
Logistic regression ;scc scctio: !!!, l:cc, ,iclcs :ti:g :csults i: t|c io:u
oi sulcccc:cc:t cciult :o||ilitics, w|ic| u, |vc to |c :csclcc to
cc| scguc:t`s vc:gc cciult :o||ilit, ;scc scctio: .!1,
61
62
lo: ll ot|c: statistical :c heuristic rating models, it is :cccss:, to ssig:
cciult :o||ilitics i: t|c cli|:tio: :occss l: suc| cscs, it u, lso
|c :cccss:, to :csclc :csults i: o:cc: to oiisct sulc ciiccts ;scc scctio:
.!!,
I|c option pricing model l:cc, ,iclcs sulci:ccc:cc:t cciult :o|
|ilitics
|:t !- li|:tio: c|cuc
5.3.1 Calibration for Logistic Regression
I|c :csults outut |, logistic :cg:cssio: :c l:cc, i: t|c io:u oi cciult :o|
|ilitics I|c vc:gc oi t|csc cciult :o||ilitics io: ll cscs i: t|c sulc
co::cso:cs to t|c :oo:tio: oi |c cscs i:cluccc :io:i i: t|c :l,sis su
lc li logistic :cg:cssio: is o:l, o:c oi scvc:l uoculcs i: t|c ovc:ll :ti:g
uoccl ;cg i: |,|:ic s,stcus, :c t|c :ti:g :csult c::ot |c i:tc::ctcc
ci:cctl, s cciult :o||ilit,, t|c :occcu:c ccsc:i|cc u:cc: .!! is to |c
licc
Rescaling cciult :o||ilitics is t|c:cio:c :cccss:, w|c:cvc: t|c :oo:
tio: oi gooc :c |c cscs i: t|c sulc cocs :ot utc| t|c ctul couositio:
oi t|c o:tiolio i: w|ic| t|c :ti:g uoccl is uc:t to |c uscc I|is is gc:c:ll,
t|c csc w|c: t|c |:| c|ooscs :ot to co:cuct iull ct su:vc, I|c vc:gc
cciult :o||ilit, i: t|c sulc is usull, su|st:till, |ig|c: t|: t|c o:t
iolio`s vc:gc cciult :o||ilit, I|is is csccill, t:uc i: cscs w|c:c :c
coui::tl, |c cscs :c collcctcc io: :ti:g s,stcu ccvclouc:t
l: suc| cscs, t|c sulc cciult :o||ilitics cctc:ui:cc |, logistic :cg:cs
sio: |vc to |c sclcc to t|c vc:gc u:|ct o: o:tiolio cciult :o||ilit, I|c
scli:g :occss is c:io:ucc i: suc| w, t|t t|c scguc:t`s co::cct vc:gc
cciult :o||ilit, is tti:cc usi:g sulc w|ic| is :c:csc:ttivc oi t|c scg
uc:t ;scc c|:t !-, lo: cxulc, it is ossi|lc to usc ll gooc cscs i:ou t|c
ct collcctcc s :c:csc:ttivc sulc, s t|csc :c:csc:t t|c |:|`s ctul
o:tiolio to |c ctu:cc |, t|c :ti:g uoccl
l: o:cc: to c:io:u cli|:tio:, it is :cccss:, to |:ow t|c scguc:t`s vc:
gc cciult :tc I|is :tc c: |c cstiutcc usi:g c:ccit :co:ti:g i:io:utio:,
io: cxulc l: t|is :occss, it is :cccss:, to c:su:c t|t cxtc::l sou:ccs :c i:
ositio: to ccli:ctc cc| scguc:t wit| suiiicic:t :ccisio: :c i: li:c wit|
t|c |:|`s i:|ousc ccii:itio:s
l: ccitio:, it is :cccss:, to , ttc:tio: to t|c cciult c:itc:io: uscc |,
t|c cxtc::l sou:cc li t|is c:itc:io: cocs :ot utc| t|c o:c uscc i: t|c :occss
oi ccvcloi:g t|c :ti:g uoccl, it will |c :cccss:, to c|ust cstiutcs oi t|c
scguc:t`s vc:gc cciult :tc li, io: cxulc, t|c cxtc::l i:io:utio: sou:cc
ccvitcs i:ou lscl ll guiccli:cs :c uscs t|c cccl:tio: oi |:|:utc, s t|c
cciult c:itc:io:, :c ii t|c lo: loss :ovisio: c:itc:io: is uscc i: ccvcloi:g
t|c uoccl, t|c scguc:t`s cstiutcc vc:gc cciult :o||ilit, cco:ci:g to t|c
cxtc::l sou:cc will |vc to |c c|ustcc uw:c I|is is cuc to t|c ict t|t :ot
cvc:, lo: loss :ovisio: lccs to |:|:utc, :c t|c:cio:c uo:c lo: loss :o
visio: cciults t|: |:|:utc, cciults occu:
ulc cciult :tcs :c :ot sclcc ci:cctl, |, cou:i:g t|c cciult :o|
|ilitics i: t|c sulc :c t|c o:tiolio, |ut i:ci:cctl, usi:g :cltivc cciult i:c
quc:cics ;kDls,, w|ic| :c:csc:t t|c :tio oi |c cscs to gooc cscs i: t|c
sulc
kDl is ci:cctl, :oo:tio:l to t|c gc:c:l :o||ilit, oi cciult ;lD,
111
11
1 11
o: 11
111
1 111
I|c :occss oi :cscli:g t|c :csults oi logistic :cg:cssio: i:volvcs six stcs
1 lcultio: oi t|c vc:gc cciult :tc :csulti:g i:ou logistic :cg:cssio:
usi:g sulc w|ic| is :c:csc:ttivc oi t|c :o:cciultcc o:tiolio
! o:vc:sio: oi t|is vc:gc sulc cciult :tc i:to kDl
sulc
! lcultio: oi t|c vc:gc o:tiolio cciult :tc :c co:vc:sio: i:to
kDl
o:tiolio
+ kc:csc:ttio: oi cc| cciult :o||ilit, :csulti:g i:ou logistic :cg:cssio:
s kDl
u:sclcc
. \ultilictio: oi kDl
u:sclcc
|, t|c scli:g icto: scciiic to t|c :ti:g
uoccl
111
:co|cd
111
ni:co|cd

111
joit)o|io
111
:oij|c
o o:vc:sio: oi t|c :csulti:g sclcc kDl i:to sclcc cciult :o||ilit,
I|is u|cs it ossi|lc to clcultc sclcc cciult :o||ilit, io: cc|
ossi|lc vluc :csulti:g i:ou logistic :cg:cssio: :cc t|csc cciult :o||il
itics |vc |cc: ssig:cc to g:ccs i: t|c :ti:g sclc, t|c cli|:tio: is cou
lctc
5.3.2 Calibration in Standard Cases
li t|c :csults gc:c:tcc |, t|c :ti:g uoccl :c :ot l:cc, sulcccc:cc:t
cciult :o||ilitics |ut ;io: cxulc, sco:c vlucs, it is ii:st :cccss:, to ssig:
cciult :o||ilitics to t|c :ti:g :csults :c ossi|lc w, oi coi:g so is out
li:cc |clow I|is :oc| i:cluccs :cscli:g s ciscusscc i: .!1,
I|c :ti:g uoccl`s vluc ::gc is civiccc i:to scvc:l i:tc:vls cco:ci:g to
t|c g::ul:it, oi t|c vluc sclc :c t|c qu:tit, oi ct vil|lc I|c
i:tc:vls s|oulc |c ccii:cc i: suc| w, t|t t|c ciiic:c:ccs |ctwcc: t|c
co::cso:ci:g vc:gc cciult :o||ilitics :c suiiicic:tl, l:gc, :c t
t|c suc tiuc t|c co::cso:ci:g clsscs co:ti: suiiicic:tl, l:gc :uu|c:
oi cscs ;|ot| gooc :c |c, As :ulc, t lcst 100 cscs c: i:tc:vl :c
:cccss:, to c:|lc ii:l, :cli|lc cstiutc oi t|c cciult :tc A ui:iuuu
of approximately 10 intervals should be defined.
63
The interval widths do
not necessarily have to be identical.
8. An RDF
unscaled
is calculated for each interval. This corresponds to the ratio
of bad cases to good cases in each score value interval of the overall sample
used in rating development.
9. Multiplication of RDF
unscaled
by the rating models specific scaling factor,
which is calculated as described in section 5.3.1:
RDF
scaled
RDF
unscaled

RDF
portfolio
RDF
sample
10. Conversion of RDFscaled into scaled probabilities of default (PD) for each
interval.
This procedure assigns rating models score value intervals to scaled default
probabilities. In the next step, it is necessary to apply this assignment to all of
the possible score values the rating model can generate, which is done by means
of interpolation.
If rescaling is not necessary, which means that the sample already reflects the
correct average default probability, the default probabilities for each interval are
calculated directly in step 2 and then used as input parameters for interpolation;
steps 3 and 4 can thus be omitted.
For the purpose of interpolation, the scaled default probabilities are plotted
against the average score values for the intervals defined. As each individual
score value (and not just the interval averages) is to be assigned a probability
of default, it is necessary to smooth and interpolate the scaled default probabil-
ities by adjusting them to an approximation function (e.g. an exponential func-
tion).
Reversing the order of the rescaling and interpolation steps would lead to a
miscalibration of the rating model. Therefore, if rescaling is necessary, it should
always be carried out first.
Finally, the score value bandwidths for the individual rating classes are
defined by inverting the interpolation function. The rating models score values
to be assigned to individual classes are determined on the basis of the defined
PD limits on the master scale.
As only the data from the collection stage can be used to calibrate the over-
all scoring function and the estimation of the segments average default proba-
bilities frequently involves a certain level of uncertainty, it is essential to validate
the calibration regularly using a data sample gained from ongoing operation of
the rating model in order to ensure the functionality of a rating procedure (cf.
section 6.2.2). Validating the calibration in quantitative terms is therefore one
of the main elements of rating model validation, which is discussed in detail in
chapter 6.
63
In the case of databases which do not fulfill these requirements, the results of calibration are to be regarded as statistically
uncertain. Validation (as described in section 6.2.2) should therefore be carried out as soon as possible.
5.4 Transition Matrices
I|c :ti:g :csult gc:c:tcc io: scciiic custouc:
o+
c: c|:gc ovc: tiuc I|is
is cuc to t|c ict t|t custouc: |s to |c :c:tcc :cgul:l, |ot| |cio:c :c
itc: t|c co:clusio: oi c:ccit g:ccuc:t cuc to :cgulto:, :cqui:cuc:ts :c
t|c :ccc to c:su:c t|c :cgul: :c cu::c:t uo:ito:i:g oi c:ccit :is| i:ou |usi
:css c:scctivc l: li:c wit| |cst |usi:css :cticcs, t|c :cqui:cuc:ts :isi:g
i:ou lscl ll cll io: :ti:gs to |c :c:cwcc :cgul:l, ;t lcst o: : ::ul
|sis,, t|is is to |c c::icc t cvc: s|o:tc: i:tc:vls i: t|c csc oi :oticc|l,
|ig|c: :is|
o.
I|is i:io:utio: c: |c uscc to iu:ovc :is| clssiiictio: :c
to vlictc :ti:g uoccls
l: ccitio: to t|c cxct ssig:uc:t oi cciult :o||ilitics to t|c i:civicul
:ti:g clsscs ; :occss w|ic| is ii:st c:io:ucc o:l, io: ccii:cc tiuc |o:izo:
oi 1! uo:t|s,, it is lso ossi|lc to cctc:ui:c |ow t|c :ti:g will c|:gc i: t|c
iutu:c io: lo:gc:tc:u c:ccit icilitics I|c t::sitio: ut:iccs scciiic to cc|
:ti:g uoccl i:cictc t|c :o||ilit, oi t::sitio: io: cu::c:t :ti:gs ;listcc i:
coluu:s, to t|c v:ious :ti:g clsscs ;listcc i: :ows, cu:i:g scciiicc tiuc
c:ioc l: :cticc, tiuc c:iocs oi o:c o: uo:c ,c:s :c gc:c:ll, uscc io:
t|is u:osc
I|is scctio: o:l, :csc:ts t|c uct|ocicl iu:cuc:tls i:volvcc i: cctc:
ui:i:g t::sitio: ut:iccs I|ci: lictio:, io: cxulc i: :is||scc :ici:g,
is :ot covc:cc i: t|is cocuuc:t lo: i:io:utio: o: |c|tcsti:g t::sitio:
ut:iccs, lcsc :cic: to scctio: o!!
5.4.1 The One-Year Transition Matrix
l: o:cc: to clcultc t|c t::sitio: ut:ix io: tiuc |o:izo: oi o:c ,c:, it is
:cccss:, to icc:tii, t|c :ti:g :csults io: ll custouc:s :tcc i: t|c cxisti:g
ct sct :c to list t|csc :csults ovc: 1!uo:t| c:ioc Dsi:g t|is ct, ll
o|sc:vcc c|:gcs |ctwcc: :ti:g clsscs :c cou:tcc :c couilcc i: t|lc
|:t +0 givcs : cxulc oi suc| ut:ix
|:t +0 \t:ix oi A|solutc I::sitio: l:cquc:cics ;lxulc,
64
The explanations below also apply analogously to transaction-specific ratings.
65
Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Annex D-5, Nos. 27 and 29.
Wit| :cg:c to t|c tiuc i:tc:vl |ctwcc: co:sccutivc custouc: :ti:gs, it is
:cccss:, ccii:c u:gi: oi tolc::cc io: t|c ctul tiuc i:tc:vl |ctwcc: :t
i:g :csults io:, s t|c ctul i:tc:vls will o:l, ::cl, |c cxctl, o:c ,c: l: t|is
co:tcxt, it is :cccss:, to c:su:c t|t t|c vc:gc tiuc i:tc:vl io: t|c :ti:g
i:s cctc:ui:cc utc|cs t|c tiuc |o:izo: io: w|ic| t|c t::sitio: ut:ix is
ccii:cc At t|c suc tiuc, t|c ::gc oi tiuc i:tc:vls :ou:c t|is vc:gc
s|oulc :ot |c so l:gc t|t vlic t::sitio: ut:ix c::ot |c clcultcc
I|c ::gc oi tiuc i:tc:vls co:sicc:cc vlic io: clculti:g t::sitio: ut:ix
s|oulc lso |c co:sistc:t wit| t|c |:|`s i:|ousc guiccli:cs io: sscssi:g
w|ct|c: custouc: :c:ti:gs :c u to ctc :c c:io:ucc :cgul:l,
Actul c:ccit cciults :c i:cquc:tl, listcc s sc:tc clss ;ic i: t|ci:
ow: coluu:, I|is u|cs sc:sc i:soi: s cciult ccsc:i|cs t|c t::sitio:
oi :tcc |o::owc: to t|c cciultcc lo:s clss
l:cquc:tl, cscs will ccuuultc lo:g t|c ui: cigo:l oi t|c ut:ix
I|csc cscs :c:csc:t |o::owc:s w|ic| cic :ot uig:tc i:ou t|ci: o:igi:l
:ti:g clss ovc: t|c tiuc |o:izo: o|sc:vcc I|c ot|c: |o::owc:s io:u |:c
:ou:c t|c ui: cigo:l, w|ic| |ccoucs lcss cc:sc wit| i:c:csi:g cist:cc
i:ou t|c cigo:l I|is co:cc:t:tio: :ou:c t|c ui: cigo:l co::cltcs wit|
t|c :uu|c: oi cxisti:g :ti:g clsscs s wcll s t|c st|ilit, oi t|c :ti:g :occ
cu:c I|c uo:c :ti:g clsscs uoccl uscs, t|c uo:c i:cquc:tl, :ti:g clsscs
will c|:gc :c t|c lowc: t|c co:cc:t:tio: lo:g t|c ui: cigo:l will |c
I|c suc lics i: t|c csc oi ccc:csi:g st|ilit, i: t|c :ti:g :occcu:c
l: o:cc: to clcultc t::sitio: :o||ilitics, it is :cccss:, to co:vc:t t|c
|solutc :uu|c:s i:to c:cc:tgcs ;:ow :o||ilitics, I|c :csulti:g :o||il
itics i:cictc t|c i:ctio: oi cscs i: givc: clss w|ic| ctull, :cui:cc i:
t|ci: o:igi:l clss I|c t::sitio: :o||ilitics oi cc| :ow i:cluci:g t|c
cciult :o||ilit, oi cc| clss i: t|c lst coluu: s|oulc cc u to 100
|:t +1 lui:icl :cYc: I::sitio: \t:ix
lsccill, wit| sull :uu|c: oi o|sc:vtio:s c: ut:ix iiclc, t|c cui:
icl t::sitio: ut:ix cc:ivcc i: t|is u::c: will s|ow i:co:sistc:cics l:co:
sistc:cics :cic: to situtio:s w|c:c l:gc stcs i: :ti:gs :c uo:c :o||lc t|:
sullc: stcs i: t|c suc ci:cctio: io: givc: :ti:g clss, o: w|c:c t|c :o|
|ilit, oi c:ci:g u i: cc:ti: :ti:g clss is uo:c :o||lc io: uo:c :cuotc
:ti:g clsscs t|: io: c|cc:t clsscs l: t|c t::sitio: ut:ix, i:co:sistc:cics
u:iicst t|cusclvcs s :o||ilitics w|ic| co :ot ccc:csc uo:oto:icll, s
t|c, uovc w, i:ou t|c ui: cigo:l oi t|c ut:ix D:cc: t|c ssuutio:
t|t vlic :ti:g uoccl is uscc, t|is is :ot lusi|lc
l:co:sistc:cics c: |c :cuovcc |, suoot|i:g t|c t::sitio: ut:ix
uoot|i:g :cic:s to otiuizi:g t|c :o||ilitics oi i:civicul cclls wit|out vio
lti:g t|c co:st:i:t t|t t|c :o||ilitics i: :ow uust cc u to 100 As
:ulc, suoot|i:g s|oulc o:l, iicct ccll vlucs t t|c ccgcs oi t|c t::sitio:
ut:ix, w|ic| :c :ot sttisticll, sig:iiic:t cuc to t|ci: low |solutc t::sitio:
i:cquc:cics l: t|c :occss oi suoot|i:g t|c ut:ix, it is :cccss:, to c:su:c
t|t t|c :csulti:g cciult :o||ilitics i: t|c i:civicul clsscs utc| t|c cciult
:o||ilitics i:ou t|c cli|:tio:
|:t +! s|ows t|c suoot|cc ut:ix io: t|c cxulc givc: |ovc l: t|is
csc, it is wo:t| :oti:g t|t t|c cciult :o||ilitics :c souctiucs |ig|c: t|:
t|c :o||ilitics oi t::sitio: to lowc: :ti:g clsscs I|csc :c:t i:co:sis
tc:cics c: |c cxli:cc |, t|c ict t|t i: i:civicul cscs t|c cciult cvc:t
occu:s c:lic: t|: :ti:g cctc:io:tio: l: ict, it is c:ti:cl, co:cciv|lc t|t
custouc: wit| vc:, gooc cu::c:t :ti:g will cciult, |ccusc :ti:gs o:l,
ccsc:i|c t|c vc:gc |c|vio: oi g:ou oi siuil: custouc:s ovc: ii:l, lo:g
tiuc |o:izo:, :ot cc| i:civicul csc
|:t +! uoot|cc I::sitio: \t:ix ;lxulc,
Duc to t|c l:gc :uu|c: oi :uctc:s to |c cctc:ui:cc, t|c ct :cqui:c
uc:ts io: clculti:g vlic t::sitio: ut:ix :c vc:, |ig| lo: :ti:g uoccl
wit| 1. clsscs lus o:c cciult clss ;s i: t|c cxulc |ovc,, it is :cccss:, to
couutc totl oi !!. t::sitio: :o||ilitics lus 1. cciult :o||ilitics As
sttisticll, vlic cstiutcs oi t::sitio: i:cquc:cics :c o:l, ossi|lc givc: sui
iicic:t :uu|c: oi o|sc:vtio:s c: ut:ix iiclc, t|csc :cqui:cuc:ts uou:t to
scvc:l t|ous:c o|sc:vcc :ti:g t::sitio:s ssuui:g : cvc: cist:i|utio: oi
t::sitio:s c:oss ll ut:ix iiclcs Duc to t|c gc:c:ll, o|sc:vcc co:cc:t:tio:
:ou:c t|c ui: cigo:l, |owcvc:, t|c ctul :cqui:cuc:t io: vlic cstiutcs
:c su|st:till, |ig|c: t t|c ccgcs oi t|c ut:ix
5.4.2 Multi-Year Transition Matrices
li suiiicic:tl, l:gc ct|sc is vil|lc, uulti,c: t::sitio: ut:iccs c: |c
clcultcc i: u::c: :logous to t|c :occcu:c ccsc:i|cc |ovc usi:g t|c
co::cso:ci:g :ti:g i:s :c lo:gc: tiuc i:tc:vl
li it is :ot ossi|lc to clcultc uulti,c: t::sitio: ut:iccs cui:icll,,
t|c, c: lso |c cctc:ui:cc o: t|c |sis oi t|c o:c,c: t::sitio: ut:ix
:c :occcu:c w|ic| is couuo: i: :cticc is to ssuuc sttio::it, o: t|c
\:|ov :oc:t, i: t|c o:c,c: t::sitio: ut:ix, :c to clcultc t|c :,c:
t::sitio: ut:ix |, :isi:g t|c o:c,c: ut:ix to t|c :t| owc: l: t|is w,,
io: cxulc, t|c two,c: t::sitio: ut:ix is clcultcc |, uultil,i:g t|c
o:c,c: ut:ix |, itscli
l: o:cc: to o|ti: usciul :csults wit| t|is :occcu:c, it is iuo:t:t to :otc
t|t t|c sttio::it, ssuutio: is :ot :cccss:il, iuliillcc io: t::sitio:
ut:ix l: :ticul:, cco:ouic iluctutio:s |vc st:o:g i:iluc:cc o: t|c tc:
cc:c, oi :ti:g :csults to cctc:io:tc o: iu:ovc, uc:i:g t|t t|c t::sitio:
ut:ix is :ot st|lc ovc: lo:gc: c:iocs oi tiuc lui:icll, clcultcc
uulti,c: t::sitio: ut:iccs :c t|c:cio:c :cic:|lc to clcultcc t::sitio:
ut:iccs l: :ticul:, t|c uulti,c: ;cuuultivc, cciult :tcs i: t|c lst col
uu: oi t|c uulti,c: t::sitio: ut:ix c: oitc: |c clcultcc ci:cctl, i: t|c
:occss oi cli|:ti:g :c |c|tcsti:g :ti:g uoccls
l: t|c lst coluu: oi t|c :,c: ut:ix ;cciult,, wc scc t|c cuuultivc
cciult :tc ;cuuDk, lo: cc| :ti:g clss, t|is cciult :tc i:cictcs t|c :o|
|ilit, oi t::sitio: to t|c cciult clss wit|i: : ,c:s |:t +! s|ows t|c cuuu
ltivc cciult :tcs oi t|c :ti:g clsscs i: t|c cxulc uscc |c:c
I|c cuuultivc cciult :tcs s|oulc cx|i|it t|c iollowi:g two :oc:tics
1 l: cc| :ti:g clss, t|c cuuultivc cciult :tcs i:c:csc lo:g wit| t|c
lc:gt| oi t|c tc:u :c :oc| 100 ovc: i:ii:itcl, lo:g tc:us
! li t|c cuuultivc cciult :tcs :c lottcc ovc: v:ious tiuc |o:izo:s, t|c
cu:vcs oi t|c i:civicul :ti:g clsscs co :ot i:tc:scct, t|t is, t|c cuuul
tivc cciult :tc i: gooc :ti:g clss will |c lowc: t|: i: t|c i:ic:io:
clsscs io: ll tiuc |o:izo:s
I|c ii:st :oc:t, oi cuuultivc cciult :o||ilitics c: |c vc:iiicc csil,
vc: 1!uo:t| c:ioc, wc ssuuc t|t t|c :ti:g clssccc:cc:t :o|
|ilit, oi o|sc:vi:g cciult i: ::coul, sclcctcc lo: cquls 1, io:
cxulc
li t|is lo: is o|sc:vcc ovc: c:ioc twicc s lo:g, t|c :o||ilit, oi cciult
woulc |vc to |c g:ctc: t|: t|c cciult :o||ilit, io: t|c ii:st 1! uo:t|s
;1,, s t|c :o||ilit, oi cciult io: t|c scco:c ,c: c::ot |ccouc zc:o
cvc: ii t|c csc uig:tcs to ciiic:c:t :ti:g clss t t|c c:c oi t|c ii:st ,c:
Acco:ci:gl,, t|c cuuultivc cciult :o||ilitics io: !, +, ., :c uo:c ,c:s
io:u st:ictl, uo:oto:ic scc:ci:g scquc:cc I|is scquc:cc |s : uc:
liuit ;uxiuuu :o||ilit, oi cciult io: cc| i:civicul csc 100 ,
:c is t|c:cio:c co:vc:gc:t
I|c liuit oi t|is scquc:cc is 100, s ovc: : i:ii:itcl, lo:g tc:u cvc:, lo:
will cciult cuc to t|c ict t|t t|c cciult :o||ilit, oi cc| :ti:g clss
c::ot cqul zc:o
I|c :oc:t, oi :o:i:tc:scctio: i: t|c cuuultivc cciult :o||ilitics oi
t|c i:civicul :ti:g clsscs :csults i:ou t|c :cqui:cuc:t t|t t|c :ti:g uoccl
s|oulc |c |lc to ,iclc ccqutc c:ccitwo:t|i:css io:ccsts :ot o:l, io: s|o:t
tiuc c:ioc |ut lso ovc: lo:gc: c:iocs As t|c cuuultivc cciult :o||ilit,
co::cltcs wit| t|c totl :is| oi lo: ovc: its uulti,c: tc:u, co:sistc:tl,
lowc: cuuultivc cciult :o||ilitics i:cictc t|t ;cctc:is :i|us, t|c totl
:is| oi lo: i: t|c :ti:g clss o|sc:vcc is lowc: t|: t|t oi lo: i: : i:ic
:io: :ti:g clss
|:t +! uuultivc Dciult ktcs ;lxulc Dciult ktcs o: log:it|uic clc,
I|c cuuultivc cciult :tcs :c uscc to clcultc t|c u:gi:l cciult :tcs
;u:g
Dk
, io: cc| :ti:g clss I|csc :tcs i:cictc t|c c|:gc i: cuuultivc
cciult :tcs i:ou ,c: to ,c:, t|t is, t|c iollowi:g lics
marg
DR.n

cum
DR.n
cum
DR.n
cum
DR.n1
_
io: : 1 ,c:
io: : !, !, + ,c:s
Duc to t|c ict t|t cuuultivc cciult :tcs scc:c uo:oto:icll, ovc:
tiuc, t|c u:gi:l cciult :tcs :c lw,s ositivc lowcvc:, t|c cu:vcs oi
t|c u:gi:l cciult :tcs io: t|c vc:, gooc :ti:g clsscs will i:c:csc uo:ot
o:icll,, w|c:cs uo:oto:icll, ccc:csi:g cu:vcs c: |c o|sc:vcc io: t|c vc:,
low :ti:g clsscs ;ci c|:t ++, I|is is cuc to t|c ict t|t t|c gooc :ti:g
clsscs s|ow su|st:till, l:gc: otc:til io: cctc:io:tio: cou:cc to t|c
vc:, |c :ti:g clsscs I|c :ti:g oi lo: i: t|c |cst :ti:g clss c::ot
iu:ovc, |ut it c: i:cccc cctc:io:tc, lo: i: t|c scco:c|cst :ti:g clss
c: o:l, iu:ovc |, o:c clss, |ut it c: cctc:io:tc |, uo:c t|: o:c clss,
ctc I|c situtio: is :logous io: :ti:g clsscs t t|c lowc: c:c oi t|c sclc
lo: t|is :cso:, cvc: i: s,uuct:icl t::sitio: ut:ix wc c: o|sc:vc : i:i
til i:c:csc i: u:gi:l cciult :tcs i: t|c vc:, gooc :ti:g clsscs :c : i:itil
ccc:csc i: u:gi:l cciult :o||ilitics i: t|c vc:, oo: :ti:g clsscs l:ou
t|c |usi:css c:scctivc, wc |:ow t|t low:tcc |o::owc:s w|o su:vivc scv
c:l ,c:s osc lcss :is| t|: lo:s w|ic| :c ssig:cc t|c suc :ti:g t t|c
|cgi::i:g |ut cciult i: t|c uc:tiuc lo: t|is :cso:, i: :cticc wc c: lso
o|sc:vc tc:cc:c, tow:c lowc: g:owt| i: cuuultivc cciult :o||ilitics i:
t|c lowc: :ti:g clsscs
|:t ++ \:gi:l Dciult ktcs ;lxulc Dciult ktcs o: log:it|uic clc,
o:citio:l cciult :tcs ;co:c
Dk
, i:cictc t|c :o||ilit, t|t |o::owc:
will cciult i: t|c :t| ,c: ssuui:g t|t t|c |o::owc: |s su:vivcc t|c ii:st
;:1, ,c:s I|csc co:citio:l cciult :tcs c: |c clcultcc usi:g cuuultivc
:c u:gi:l cciult :tcs s iollows
cond
DR.n

marg
DR.n
marg
DR.n
1 cum
DR.n1
_
_
_
io: : 1 ,c:
io: : !, !, + ,c:s
|:t +. s|ows t|c cu:vc oi co:citio:l cciult :tcs io: cc| :ti:g clss l:
t|is co:tcxt, it is :cccss:, to c:su:c t|t t|c cu:vcs io: t|c lowc: :ti:g clsscs
:cui: |ovc t|osc oi t|c gooc :ti:g clsscs :c t|t :o:c oi t|c cu:vcs i:tc:
scct I|is :cilccts t|c :cqui:cuc:t t|t :ti:g uoccl s|oulc |c |lc to cisc:iu
i:tc c:ccitwo:t|i:css :c clssii, |o::owc:s co::cctl, ovc: scvc:l ,c:s
I|c:cio:c, t|c co:citio:l :o||ilitics lso |vc to s|ow |ig|c: vlucs i: ltc:
,c:s io: |o::owc: w|o is i:itill, :tcc lowc: t|: io: |o::owc: w|o is i:i
till, :tcc |ig|c: l: t|is co:tcxt, co:citio:l cciult :o||ilitics ccou:t io:
t|c ict t|t cciults c::ot |vc |c:cc i: :cvious ,c:s w|c: |o::owc:s
:c cou:cc i: ltc: ,c:s
|:t +. o:citio:l Dciult ktcs ;lxulc Dciult ktcs o: log:it|uic clc,
W|c: t|c \:|ov :oc:t, is licc to t|c t::sitio: ut:ix, t|c co:ci
tio:l cciult :tcs co:vc:gc tow:c t|c o:tiolio`s vc:gc cciult :o||ilit,
io: ll :ti:g clsscs s t|c tiuc |o:izo: |ccoucs lo:gc: l: t|is :occss, t|c
o:tiolio tti:s sttc oi |l:cc i: w|ic| t|c i:cquc:c, cist:i|utio: oi t|c
i:civicul :ti:g clsscs :o lo:gc: s|iits :oticc|l, cuc to t::sitio:s l: :c
ticc, |owcvc:, suc| st|lc o:tiolio sttc c: o:l, |c o|sc:vcc i: cscs w|c:c
t|c :ti:g clss cist:i|utio: :cui:s co:st:t i: :cw |usi:css :c gc:c:l ci:
cuust:ccs :cui: u:c|:gcc ovc: scvc:l ,c:s ;ic sclcou,
6 Validating Rating Models
I|c tc:u vlictio: is ccii:cc i: t|c ui:iuuu :cqui:cuc:ts oi t|c lkl
:oc| s iollows
The institution shall have a regular cycle of model validation that includes mon-
itoring of model performance and stability; review of model relationships; and testing
of model outputs against outcomes.
oo
|:t +o |clow givcs : ovc:vicw oi t|c cssc:til sccts oi vlictio:
I|c :c oi quantitative validation cou:iscs ll vlictio: :occcu:cs i:
w|ic| sttisticl i:cicto:s io: t|c :ti:g :occcu:c :c clcultcc :c i:tc:
:ctcc o: t|c |sis oi : cui:icl ct sct uit|lc i:cicto:s i:clucc t|c
uoccl`s a :c b c::o:s, t|c ciiic:c:ccs |ctwcc: t|c io:ccst :c :clizcc cciult
:tcs oi :ti:g clss, o: t|c Gi:i cociiicic:t :c AD s ucsu:cs oi cisc:iu
i:to:, owc:
l: co:t:st, t|c :c oi qualitative validation iuliills t|c :iu:, ts| oi
c:su:i:g t|c lic|ilit, :c :oc: lictio: oi t|c qu:tittivc uct|ocs
i: :cticc Wit|out c:ciul :cvicw oi t|csc sccts, t|c :ti:g`s i:tc:ccc u:
osc c::ot |c c|icvcc ;o: u, cvc: |c :cvc:scc, |, u:suit|lc :ti:g :occ
cu:cs cuc to cxccssivc iit| i: t|c uoccl
o
66
67
Cf. EUROPEAN COMMISSION, Annex D-5, No. 41 ff.
|:t +o Asccts oi kti:g \occl Vlictio:
o
|:t + Vlictio: l:occcu:c io: kti:g \occls
I|csc two sccts oi vlictio: coulcuc:t cc| ot|c: A :ti:g :occcu:c
s|oulc o:l, |c licc i: :cticc ii it :cccivcs ositivc sscssuc:t i: t|c
qulittivc :c A ositivc sscssuc:t o:l, i: qu:tittivc vlictio: is :ot sui
iicic:t I|is lso lics to :ti:g :occcu:cs uscc wit|i: : lkl :oc|
68
Adapted from DEUTSCHE BUNDESBANK, Monthly Report for September 2003, Approaches to the validation of internal
rating systems.
o:vc:scl,, :cgtivc qu:tittivc sscssuc:t s|oulc :ot |c co:sicc:cc
cccisivc to t|c gc:c:l :c|cctio: oi :ti:g :occcu:c I|is is csccill, t:uc
|ccusc t|c sttisticl cstiutcs t|cusclvcs :c su||cct to ::cou iluctutio:s,
:c t|c ccii:itio: oi suit|lc tolc::cc ::gc llows cc:ti: ccg:cc oi i:cc
cou i: t|c i:tc::cttio: oi :l,sis :csults lt is t|c:cio:c :cccss:, to lcc
g:ctc: cu|sis o: qulittivc vlictio:
Wit| :cg:c to vlictio:, lscl ll iuoscs t|c iollowi:g ccitio:l :cqui:c
uc:ts o: |:|s usi:g t|c lkl :oc|
I|c vlictio: :occss uust |c ccsc:i|cc i: t|c :ti:g uoccl`s documenta-
tion I|is is : cxlicit
o-
:cqui:cuc:t io: sttisticl uoccls, io: w|ic| vlictio:
is l:cc, : cssc:til icto: i: uoccl ccvclouc:t l: t|is iuil, oi uoccls,
vlictio: uust lso i:clucc outoisulc :c outoitiuc c:io:u:cc tcsts
w|ic| :cvicw t|c |c|vio: oi t|c uoccl`s :csults usi:g u:|:ow: ct ;ic ct
:ot uscc i: ccvcloi:g t|c uoccl,
I|c c:ccit :is| co:t:ol u:it s|oulc |c :cso:si|lc io: carrying out the vali-
dation process, i: t|is co:tcxt, it is csccill, iuo:t:t to sc:tc vlictio:
ctivitics i:ou t|c i:o:t oiiicc
0
lowcvc:, t|c o:g:iztio:l sccts oi vlic
tio: will :ot |c ciscusscc i: g:ctc: cctil |c:c
Vlictio: uct|ocologics uust :ot |c i:iluc:ccc |, c|:gcs i: gc:c:l cco
:ouic co:citio:s lowcvc:, t|c i:tc::cttio: oi ccvitio:s icc:tiiicc i: t|c
vlictio: :occss |ctwcc: uoccl :ccictio:s :c :clit, s|oulc t|c cxtc::l
i:iluc:ccs suc| s cco:ouic c,clcs i:to ccou:t
1
I|is is ciscusscc iu:t|c: i:
t|c :csc:ttio: oi stress tests ;scc scctio: o+,
li sig:iiic:t ccvitio:s :isc |ctwcc: t|c :uctc:s cstiutcc usi:g t|c
uoccls :c t|c vlucs ctull, :clizcc, t|c uoccls |vc to |c ctcc
!
6.1 Qualitative Validation
I|c qulittivc vlictio: oi :ti:g uoccls c: |c civiccc i:to t|:cc co:c :cs
!
\occl ccsig:
Dt qulit,
l:tc::l usc ;usc tcst,
Model Design
I|c uoccl`s ccsig: is vlictcc o: t|c |sis oi t|c :ti:g uoccl`s documentation
l: t|is co:tcxt, t|c scoc, t::s:c:c, :c coulctc:css oi cocuuc:ttio: :c
l:cc, cssc:til vlictio: c:itc:i I|c cocuuc:ttio: oi sttisticl uoccls
s|oulc t lcst covc: t|c iollowi:g :cs
Dcli:ctio: c:itc:i io: t|c :ti:g scguc:t
Dcsc:itio: oi t|c :ti:g uct|ocuoccl t,cuoccl :c|itcctu:c uscc
kcso: io: sclccti:g scciiic uoccl t,c
oulctc:css oi t|c ;|cst :cticc, c:itc:i uscc i: t|c uoccl
Dt sct uscc i: sttisticl :ti:g ccvclouc:t
Qulit, ssu::cc io: t|c ct sct
69
70
71
72
73
DEUTSCHE BUNDESBANK, Monthly Report for September 2003, Approaches to the validation of internal rating systems.
\occl ccvclouc:t :occcu:c
\occl :c|itcctu:c :c iu:cuc:tl |usi:css ssuutio:s
clcctio: :c sscssuc:t oi uoccl :uctc:s
A:l,scs io: uoccl ccvclouc:t
Qulit, ssu::ccvlictio: cu:i:g uoccl ccvclouc:t
Docuuc:ttio: oi ll uoccl iu:ctio:s
li|:tio: oi uoccl outut to cciult :o||ilitics
l:occcu:c io: vlictio::cgul: :cvicw
Dcsc:itio: oi t|c :ti:g :occss
Dutics :c :cso:si|ilitics wit| :cg:c to t|c :ti:g uoccl
lo: |cu:istic :c cusl uoccls, it is ossi|lc to ouit t|c ccsc:itio: oi t|c
ct sct :c :ts oi t|c :l,sis io: uoccl ccvclouc:t lowcvc:, i: t|csc
uoccl iuilics it is :cccss:, to c:su:c t|c t::s:c:c, oi t|c ssuutio:s
:co: cvlutio:s w|ic| io:u t|c |sis oi t|c :ti:g uoccl`s ccsig:
I|c rating method s|oulc |c sclcctcc wit| ttc:tio: to t|c o:tiolio scguc:t
to |c :l,zcc :c t|c ct vil|lc I|c v:ious uoccl t,cs :c t|ci: gc:c:l
suit|ilit, io: i:civicul :ti:g scguc:ts :c ccsc:i|cc i: c|tc: +
I|c i:iluc:cc oi i:civicul factors o: t|c :ti:g :csult s|oulc |c cou:c|c:
si|lc :c i: li:c wit| t|c cu::c:t sttc oi |usi:css :csc:c| :c :cticc lo:
cxulc, it is :cccss:, to c:su:c t|t t|c icto:s i: sttisticl |l:cc s|cct
:l,sis s,stcu :c lusi|lc :c cou:c|c:si|lc cco:ci:g to t|c iu:cuc:tls
oi ii::cil sttcuc:t :l,sis
l: sttisticl uoccls, sccil cu|sis is to |c lccc o: cocuuc:ti:g t|c
uoccl`s statistical foundations, w|ic| |vc to |c i: li:c wit| t|c st:c:cs oi
qu:tittivc vlictio:
Data Quality
l: sttisticl uoccls, ct qulit, st:cs out s gooc:cssoiiit c:itc:io: cvc:
cu:i:g uoccl ccvclouc:t \o:covc:, cou:c|c:sivc data set is : cssc:til
:c:cquisitc io: qu:tittivc vlictio: l: t|is co:tcxt, :uu|c: oi sccts |vc
to |c co:sicc:cc
oulctc:css oi ct i: o:cc: to c:su:c t|t t|c :ti:g cctc:ui:cc is cou
:c|c:si|lc
Voluuc oi vil|lc ct, csccill, ct |isto:ics
kc:csc:ttivit, oi t|c sulcs uscc io: uoccl ccvclouc:t :c vlictio:
Dt sou:ccs
\csu:cs t|c: to c:su:c qulit, :c clc:sc :w ct
I|c ui:iuuu ct :cqui:cuc:ts u:cc: t|c c:it lD ci:cctivc o:l, :ovicc
|sis io: t|c vlictio: oi ct qulit,
+
lc,o:c t|t, t|c |cst :cticcs ccsc:i
|cc io: gc:c:ti:g ct i: :ti:g uoccl ccvclouc:t ;scctio: .1, c: |c uscc
s guiccli:cs io: vlictio:
Internal Use (Use Test)
Vlicti:g t|c i:tc::l usc oi t|c :ti:g uoccls ;usc tcst, :cic:s to t|c ctul
i:tcg:tio: oi :ti:g :occcu:cs :c :csults i:to t|c |:|`s i:|ousc :is| u:
gcuc:t :c :co:ti:g s,stcus Wit| :cg:c to i:tc::l usc, t|c cssc:til
74
Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Annex D-5, No. 18, 21, 3133.
sccts oi t|c :cqui:cuc:ts iuoscc o: |:|s usi:g t|c lkl :oc| u:cc:
lscl ll i:clucc
.
Dcsig: oi t|c |:|`s i:tc::l :occsscs w|ic| i:tc:icc wit| t|c :ti:g :o
cccu:c s wcll s t|ci: i:clusio: i: o:g:iztio:l guiccli:cs
Dsc oi t|c :ti:g i: :is| u:gcuc:t ;i: c:ccit cccisio:u|i:g, :is||scc
:ici:g, :ti:g|scc couctc:cc s,stcus, :ti:g|scc liuit s,stcus, ctc,
o:io:uit, oi t|c :ti:g :occcu:cs wit| t|c |:|`s c:ccit :is| st:tcg,
lu:ctio:l sc:tio: oi :cso:si|ilit, io: :ti:gs i:ou t|c i:o:t oiiicc
;cxcct i: :ctil |usi:css,
lulo,cc quliiictio:s
Dsc: ccct:cc oi t|c :occcu:c
I|c usc:`s |ilit, to cxc:cisc i:cccou oi i:tc::cttio: i: t|c :ti:g :occ
cu:c ;io: t|is u:osc, it is :cccss:, to ccii:c suit|lc :occcu:cs :c
:occss i:cicto:s suc| s t|c :uu|c: oi ovc::iccs,
l:|s w|ic| i:tc:c to usc : lkl :oc| will |c :cqui:cc to cocuuc:t
t|csc c:itc:i coulctcl, :c i: vc:iii|lc w, kcg:clcss oi t|is :cqui:cuc:t,
|owcvc:, coulctc :c vc:iii|lc cocuuc:ttio: oi |ow :ti:g uoccls :c uscc
s|oulc io:u : i:tcg:l couo:c:t oi i:|ousc usc tcsts io: :, |:| usi:g
:ti:g s,stcu
6.2 Quantitative Validation
l: sttisticl uoccls, qu:tittivc vlictio: :c:csc:ts su|st:til :t oi
uoccl ccvclouc:t ;ci scctio: .!, lo: |cu:istic :c cusl uoccls, o: t|c
ot|c: |:c, : cui:icl ct sct is :ot ,ct vil|lc cu:i:g :ti:g ccvclouc:t
I|c:cio:c, t|c qu:tittivc vlictio: stc is ouittcc cu:i:g uoccl ccvclo
uc:t i: t|is iuil, oi uoccls
lowcvc:, qu:tittivc vlictio: is :cqui:cc io: ll :ti:g uoccls lo: t|is
u:osc, vlictio: s|oulc :iu:il, usc t|c ct gi:cc cu:i:g :cticl oc:
tio: oi t|c uoccl ou:iso: o: |c:c|u:| ct c: lso |c i:cluccc s
sulcuc:t I|is is :ticul:l, cvis|lc w|c: t|c c:io:u:cc oi uultilc
:ti:g uoccls is to |c cou:cc usi:g couuo: sulc
I|c c:itc:i to |c :cvicwcc i: qu:tittivc vlictio: :c s iollows
o
Disc:iui:to:, owc:
li|:tio:
t|ilit,
A suiiicic:t ct sct io: qu:tittivc vlictio: is vil|lc o:cc ll lo:s |vc
|cc: :tcc io: t|c ii:st tiuc ;o: :c:tcc, :c o|sc:vcc ovc: t|c io:ccsti:g
|o:izo: oi t|c :ti:g uoccl, t|is is usull, t|c csc :oxiutcl, two ,c:s
itc: :cw :ti:g uoccl is i:t:ocuccc
6.2.1 Discriminatory Power
I|c tc:u cisc:iui:to:, owc: :cic:s to t|c iu:cuc:tl |ilit, oi :ti:g
uoccl to ciiic:c:titc |ctwcc: gooc :c |c cscs
I|c tc:u is oitc: uscc

s s,:o:,u io: clssiiictio: ccu:c, l: t|is co:tcxt, t|c ctcgo:ics gooc
75
76
77
Instead of being restricted to borrower ratings, the descriptions below also apply to rating exposures in pools. For this reason, the
terms used are not differentiated.
:c |c :cic: to w|ct|c: c:ccit cciult occu:s ;|c, o: cocs :ot occu: ;gooc,
ovc: t|c io:ccsti:g |o:izo: itc: t|c :ti:g s,stcu |s clssiiicc t|c csc
I|c io:ccsti:g |o:izo: io: lD cstiutcs i: lkl :oc|cs is 1! uo:t|s
I|is tiuc |o:izo: is ci:cct :csult oi t|c ui:iuuu :cqui:cuc:ts i: t|c c:it
lD ci:cctivc
lowcvc:, t|c ci:cctivc lso cxlicitl, :cqui:cs i:stitutio:s to

usc lo:gc: tiuc |o:izo:s i: :ti:g sscssuc:ts
-
I|c:cio:c, it is lso ossi|lc
to usc ot|c: io:ccsti:g |o:izo:s i: o:cc: to otiuizc :c cli|:tc :ti:g
uoccl s lo:g s t|c :cqui:cc 1!uo:t| cciult :o||ilitics :c still clcultcc
l: t|is scctio:, wc o:l, ciscuss t|c :occcu:c licc io: io:ccsti:g |o:izo:
oi 1! uo:t|s
l: :cticc, t|c cisc:iui:to:, owc: oi : lictio: sco:i:g iu:ctio: io:
i:stlluc:t lo:s, io: cxulc, is oitc: otiuizcc io: t|c c:ti:c c:ioc oi t|c
c:ccit t::sctio: lowcvc:, io:ccsti:g |o:izo:s oi lcss t|: 1! uo:t|s o:l,
u|c sc:sc w|c:c it is lso ossi|lc to uctc :ti:g ct t suiiicic:tl, s|o:t
i:tc:vls, w|ic| is t|c csc i: ccou:t ct :l,sis s,stcus, io: cxulc
I|c cisc:iui:to:, owc: oi uoccl c: o:l, |c :cvicwcc cx ost usi:g
ct o: cciultcc :c :o:cciultcc cscs l: o:cc: to gc:c:tc suit|lc ct
sct, it is ii:st :cccss:, to c:ctc sulc oi cscs io: w|ic| t|c i:itil :ti:g s
wcll s t|c sttus ;gooc|c, 1! uo:t|s itc: ssig:uc:t oi t|c :ti:g :c
|:ow:
l: o:cc: to generate the data set io: qu:tittivc vlictio:, wc ii:st ccii:c
two cutoii ctcs wit| : i:tc:vl oi 1! uo:t|s l:coi,c: ct :c oitc: uscc
io: t|is u:osc I|c cutoii ctcs cctc:ui:c t|c :ti:g`s lictio: c:ioc to
|c uscc i: vlictio: lt is lso ossi|lc to i:clucc ct i:ou scvc:l :cvious
,c:s i: vlictio: I|is is csccill, :cccss:, i: cscs w|c:c vc:gc cciult
:tcs |vc to |c cstiutcc ovc: scvc:l ,c:s
|:t + :cti:g kti:g Vlictio: ulc io: lo:ccsti:g lo:izo: oi 1! \o:t|s
78
Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Annex D-3, Nos. 1 and 16.
79
I|c :ti:g i:io:utio: vil|lc o: ll cscs s oi t|c c:lic: cutoii ctc
;1, scc c|:t +, is uscc I|c scco:c stc i:volvcs cci:g sttus i:io:utio: s
oi t|c ltc: cutoii ctc ;!, io: ll cscs l: t|is :occss, ll cscs w|ic| wc:c
ssig:cc to cciult clss t :, oi:t |ctwcc: t|c cutoii ctcs :c clssiiicc
s |c, ll ot|c:s :c co:sicc:cc gooc scs w|ic| :o lo:gc: c: i: t|c su
lc s oi cutoii ctc ;!, |ut cic :ot cciult :c lso clssiiicc s gooc l: t|csc
cscs, t|c |o::owc: gc:c:ll, :cic t|c lo: :oc:l, :c t|c ccou:t ws
cclctcc scs io: w|ic| :o :ti:g i:io:utio: s oi cutoii ctc ;1, is vil|lc
;cg :cw |usi:css, c::ot |c i:cluccc i: t|c sulc s t|ci: sttus coulc :ot |c
o|sc:vcc ovc: t|c c:ti:c io:ccsti:g |o:izo:
|:t +- lxulc oi kti:g Vlictio: Dt
|:t .0 u:vc oi t|c Dciult ktc io: cc| kti:g lss i: t|c Dt lxulc
: t|c |sis oi t|c :csulti:g sulc, v:ious :l,scs oi t|c :ti:g :occ
cu:c`s cisc:iui:to:, owc: :c ossi|lc I|c cxulc s|ow: i: c|:t +-
io:us t|c |sis oi t|c cxl:tio:s |clow I|c cxulc :cic:s to :ti:g uoccl
wit| 10 clsscs lowcvc:, t|c :occcu:cs :csc:tcc c: lso |c licc to i:
ii:c: o|sc:vtio: sclc, cvc: to i:civicul sco:c vlucs At t|c suc tiuc, it is
:cccss:, to :otc t|t sttisticl iluctutio:s :ccoui:tc i: t|c csc oi sull
:uu|c:s oi cscs c: clss o|sc:vcc, t|us it u, :ot |c ossi|lc to gc:c:tc
uc:i:giul :csults
l: t|c cxulc |clow, t|c cciult :tc ;ic t|c :oo:tio: oi |c cscs, io:
cc| :ti:g clss i:c:cscs stccil, i:ou clss 1 to clss 10 I|c:cio:c, t|c
u:cc:l,i:g :ti:g s,stcu is o|viousl, |lc to clssii, cscs |, cciult :o||ilit,
I|c scctio:s |clow ccsc:i|c t|c uct|ocs :c i:cicto:s uscc to qu:tii, t|c
cisc:iui:to:, owc: oi :ti:g uoccls :c ultiutcl, to c:|lc sttcuc:ts suc|
s kti:g s,stcu A cisc:iui:tcs |cttc:wo:sc|ust s wcll s :ti:g s,stcu l
Frequency Distribution of Good and Bad Cases
I|c i:cquc:c, cc:sit, cist:i|utio:s :c t|c cuuultivc i:cquc:cics oi gooc :c
|c cscs s|ow: i: t|c t|lc :c c|:ts |clow sc:vc s t|c oi:t oi cc:tu:c io:
clculti:g cisc:iui:to:, owc: l: t|is co:tcxt, cuuultivc i:cquc:cics :c
clcultcc st:ti:g i:ou t|c wo:st clss, s is gc:c:ll, t|c csc i: :cticc
|:t .1 Dc:sit, lu:ctio:s :c uuultivc l:cquc:cics io: t|c Dt lxulc
|:t .! u:vc oi t|c Dc:sit, lu:ctio:s oi Gooclc scs i: t|c Dt lxulc
|:t .! u:vc oi t|c uuultivc l:o||ilitics lu:ctio:s oi Gooclc scs i: t|c Dt lxulc
I|c cc:sit, iu:ctio:s s|ow su|st:til ciiic:c:cc |ctwcc: gooc :c |c
cscs I|c cuuultivc i:cquc:cics s|ow t|t :oxiutcl, 0 oi t|c |c
cscs |ut o:l, !0 oi t|c gooc cscs |clo:g to clsscs o to 10 : t|c ot|c:
|:c, !0 oi t|c gooc cscs |ut o:l, !! oi t|c |c cscs c: |c iou:c i:
clsscs 1 to ! lc:c it is clc: t|t t|c cuuultivc :o||ilit, oi |c cscs is
g:ctc: t|: t|t oi t|c gooc cscs io: luost ll :ti:g clsscs w|c: t|c clsscs
:c :::gcc i: o:cc: i:ou |c to gooc li t|c :ti:g clsscs :c :::gcc i:ou
gooc to |c, wc c: siul, i:vc:t t|is sttcuc:t cco:ci:gl,
a and b errors
a :c b c::o:s c: |c cxli:cc o: t|c |sis oi ou: :csc:ttio: oi cc:sit, iu:c
tio:s io: gooc :c |c cscs l: t|is co:tcxt, csc`s :ti:g clss is uscc s t|c
cccisio: c:itc:io: io: c:ccit :ovl li t|c :ti:g clss is lowc: t|: :ccc
ii:cc cutoii vluc, t|c c:ccit lictio: is :c|cctcc, ii t|c :ti:g clss is |ig|c:
t|: t|t vluc, t|c c:ccit lictio: is :ovcc l: t|is co:tcxt, two t,cs oi
c::o: c: :isc
a c::o: ;t,c 1 c::o:, A csc w|ic| is ctull, |c is :ot :c|cctcc
b c::o: ;t,c ! c::o:, A csc w|ic| is ctull, gooc is :c|cctcc
l: :cticc, a c::o:s cusc cugc cuc to c:ccit cciults, w|ilc b c::o:s
cusc cou:tivcl, lcss cugc i: t|c io:u oi lost |usi:css W|c: t|c :ti:g
clss is uscc s t|c c:itc:io: io: t|c c:ccit cccisio:, t|c:cio:c, it is iuo:t:t to
ccii:c t|c cutoii vluc wit| cuc ttc:tio: to t|c costs oi cc| t,c oi c::o:
Dsull,, a :c b c::o:s :c :ot i:cictcc s |solutc :uu|c:s |ut s c:cc:
tgcs a c::o: :cic:s to t|c :oo:tio: oi gooc cscs |clow t|c cutoii vluc, t|t
is, t|c cuuultivc i:cquc:c, 1
qood
cni
oi gooc cscs st:ti:g i:ou t|c wo:st :ti:g
clss a c::o:, o: t|c ot|c: |:c, co::cso:cs to t|c :oo:tio: oi |c cscs
|ovc t|c cutoii vluc, t|t is, t|c coulcuc:t oi t|c cuuultivc i:cquc:c,
oi |c cscs 1
/od
cni

|:t .+ Dcictio: oi a :c b c::o:s wit| utoii |ctwcc: kti:g lsscs o :c
ROC Curve
:c couuo: w, oi ccicti:g t|c cisc:iui:to:, owc: oi :ti:g :occcu:cs is
t|c k u:vc,
0
w|ic| is co:st:uctcc |, lotti:g t|c cuuultivc i:cquc:cics
oi |c cscs s oi:ts o: t|c , xis :c t|c cuuultivc i:cquc:cics oi gooc cscs
lo:g t|c x xis lc| scctio: oi t|c k cu:vc co::cso:cs to :ti:g clss,
|cgi::i:g t t|c lcit wit| t|c wo:st clss
|:t .. |c oi t|c k u:vc io: t|c Dt lxulc
80
Receiver Operating Characteristic.
A: iccl :ti:g :occcu:c woulc clssii, ll ctul cciults i: t|c wo:st :t
i:g clss Acco:ci:gl,, t|c k cu:vc oi t|c iccl :occcu:c woulc :u: vc:ti
cll, i:ou t|c lowc: lcit oi:t ;0, 0, uw:cs to oi:t ;0, 100, :c
i:ou t|c:c to t|c :ig|t to oi:t ;100, 100, I|c x :c , vlucs oi t|c
k cu:vc :c lw,s cqul ii t|c i:cquc:c, cist:i|utio:s oi gooc :c |c cscs
:c icc:ticl I|c k cu:vc io: :ti:g :occcu:c w|ic| c::ot cisti:guis|
|ctwcc: gooc :c |c cscs will :u: lo:g t|c cigo:l
li t|c o||cctivc is to :cvicw :ti:g clsscs ;s i: t|c givc: cxulc,, t|c k
cu:vc lw,s co:sists oi li:c: scctio:s I|c sloc oi t|c k cu:vc i: cc|
scctio: :cilccts t|c :tio oi |c cscs to gooc cscs i: t|c :cscctivc :ti:g clss
: t|is |sis, wc c: co:clucc t|t t|c k cu:vc io: :ti:g :occcu:cs s|oulc
|c co:cvc ;ic cu:vcc to t|c :ig|t, ovc: t|c c:ti:c ::gc A violtio: oi t|is
co:citio: will occu: w|c: t|c cxcctcc cciult :o||ilitics co :ot ciiic: sui
iicic:tl,, uc:i:g t|t ;cuc to sttisticl iluctutio:s, : i:ic:io: clss will s|ow
lowc: cciult :o||ilit, t|: :ti:g clss w|ic| is ctull, suc:io: I|is
u, oi:t to :o|lcu wit| clssiiictio: ccu:c, i: t|c :ti:g :occcu:c
:c s|oulc |c cxui:cc wit| :cg:c to its sig:iiic:cc :c ossi|lc cuscs l:
t|is csc, o:c ossi|lc cusc coulc |c : cxccssivcl, ii:c ciiic:c:titio: oi :ti:g
clsscs
|:t .o :o:o:cvc k u:vc
ab error curve
I|c ccictio: oi t|c ab c::o: cu:vc is cquivlc:t to t|t oi t|c k cu:vc
I|is cu:vc is gc:c:tcc |, lotti:g t|c a c::o: gi:st t|c b c::o: I|c ab
c::o: cu:vc is cquivlc:t to t|c k cu:vc wit| t|c xcs cxc|:gcc :c t|c:
tiltcc :ou:c t|c |o:izo:tl xis Duc to t|is :oc:t,, t|c cisc:iui:to:,
owc: ucsu:cs cc:ivcc i:ou t|c ab c::o: cu:vc :c cquivlc:t to t|osc
cc:ivcc i:ou t|c k cu:vc, |ot| :c:csc:ttio:s co:ti: cxctl, t|c suc
i:io:utio: o: t|c :ti:g :occcu:c cxui:cc
|:t . |c oi t|c ab l::o: u:vc io: t|c Dt lxulc
Area under Curve (AUC) as a Measure of Discriminatory Power
AD ;:c u:cc: cu:vc, is g:|ic ucsu:c oi :ti:g :occcu:c`s cisc:iu
i:to:, owc: cc:ivcc i:ou t|c k cu:vc :c :cic:s to t|c :c u:cc: t|c
k cu:vc ;cx:csscc i: u:its w|c:c 100 1 io: |ot| xcs,
1
l: iccl :ti:g
uoccls, AD1, io: uoccls w|ic| c::ot ciiic:c:titc |ctwcc: gooc :c |c
cscs, AD1! Vlucs w|c:c AD1! :c ossi|lc |ut i:cictc t|t t|c
:ti:g s,stcu i: qucstio: clssiiics t|c cscs t lcst :tl, i: t|c w:o:g o:cc:
I|c |ig|c: t|c AD vluc is, t|c |ig|c: t|c cisc:iui:to:, owc: oi t|c :ti:g
uoccl is
lowcvc:, AD is o:cciuc:sio:l ucsu:c oi cisc:iui:to:, owc:
lssc:til i:io:utio: o: t|c s|c oi t|c k cu:vc :c t|c :oc:tics oi
t|c :ti:g uoccl cxui:cc is lost i: t|c clcultio: oi t|is vluc I|c:cio:c,
w|c: two ciiic:c:t :ti:g uoccls usi:g t|c suc sulc :c cou:cc o:
t|c |sis oi AD lo:c, it is :ot iuuccitcl, clc: w|ic| oi t|c :occcu:cs
is |cttc: i: tc:us oi c:io:u:cc I|is is csccill, t:uc w|c: t|c k cu:vcs
i:tc:scct |:t . s|ows : cxulc oi two k cu:vcs wit| t|c suc AD
l: :cticc, t|c :occcu:c w|ic| s|ows stccc: cu:vc i: t|c lowc: ::gc oi
sco:cs o: t|c lcit ;c:| li:csqu:cs, woulc |c :cic:|lc |ccusc icwc: a
c::o:s occu: t t|c suc lcvcl oi b c::o: i: t|is ::gc, cvc: t|oug| t|is
k cu:vc is :ot co:sistc:tl, co:cvc i: t|c gooc sco:c ::gcs
lcsiccs its gcouct:ic i:tc::cttio: s t|c :c u:cc: t|c k cu:vc, AD
c: lso |c i:tc::ctcc s t|c :o||ilit, t|t |c csc ::coul, sclcctcc i:ou
t|c givc: sulc will ctull, |vc lowc: :ti:g t|: ::coul, c:w: gooc
csc
81
Cf. LEE, Global Performances of Diagnostic Tests und LEE/HSIAO, Alternative Summary Indices as well as the references cited
in those works.
|:t . ou:iso: oi Iwo k u:vcs wit| t|c uc AD Vluc
I|c:c is lso : :c|scc ucsu:c oi cisc:iui:to:, owc: io: t|c ab
c::o: cu:vc t|c c::o: :c, w|ic| :c:csc:ts t|c :c u:cc::ct| t|c ab
c::o: cu:vc lscc o: t|c ccii:itio: oi t|c ab c::o: cu:vc, t|c iollowi:g is
t:uc
l::o: :c 1 AD
I|c:cio:c, AD :c t|c c::o: :c :c cquivlc:t ucsu:cs oi cisc:iui:
to:, owc: I|c sullc: t|c c::o: :c is, t|c |ig|c: t|c cisc:iui:to:, owc:
oi t|c :ti:g uoccl is I|c suc liuittio:s wit| :cg:c to o:cciuc:sio:lit,
s i: t|c csc oi AD lso l, i: t|is co:tcxt
The Pietra Index as a Measure of Discriminatory Power
A:ot|c: o:cciuc:sio:l ucsu:c oi cisc:iui:to:, owc: w|ic| c: |c
cc:ivcc i:ou t|c k cu:vc is t|c lict: l:ccx l: gcouct:ic tc:us, t|c lict:
l:ccx is ccii:cc s twicc t|c :c oi t|c l:gcst t:i:glc w|ic| c: |c c:w:
|ctwcc: t|c cigo:l :c t|c k cu:vc l: t|c csc oi co:cvc k cu:vc,
t|c :c oi t|is t:i:glc c: lso |c clcultcc s t|c :ocuct oi t|c cigo:l`s
lc:gt| :c t|c l:gcst cist:cc |ctwcc: t|c k cu:vc :c t|c cigo:l
!
I|c lict: l:ccx c: t|c o: vlucs |ctwcc: 0 ;:o:ciiic:c:titi:g :o
cccu:c, :c 1 ;iccl :occcu:c, lt c: lso |c i:tc::ctcc s t|c uxiuuu
ciiic:c:cc |ctwcc: t|c cuuultivc i:cquc:c, cist:i|utio:s oi gooc :c |c
cscs
!
82
This can also be interpreted as the largest distance between the ROC curve and the diagonal, divided by the maximum possible
distance 1,
2
p
in an ideal procedure.
83
The relevant literature contains various definitions of the Pietra Index based on different standardizations; the form used here
with the value range [0, 1] is the one defined in LEE: Global Performances of Diagnostic Tests.
Interpretation of the Pietra Index using Probability Theory
l: t|c cxl:tio: |clow, 41 :c:csc:ts t|c vc:gc |solutc ciiic:c:cc i:
cciult :o||ilitics i: t|c sulc wit| :c wit|out |:owlccgc oi t|c clssiii
ctio: oi t|c cscs i: t|c c :ti:g clsscs
41
c
j
c
j11jc 11j.
Wit| suuutio: ovc: ll :ti:g clsscs c, t|c v:i|lc j
c
:cic:s to t|c :cltivc
i:cquc:c, oi t|c ssig:uc:t oi cscs to i:civicul :ti:g clsscs, 11jc cc:otcs
t|c cciult :tc i: clss c, :c 11 st:cs io: t|c cciult :tc i: t|c sulc
cxui:cc I|us t|c iollowi:g :cltio: is t:uc
+
41 2 11 1 11 Pietra Index.
l: : iccl :occcu:c w|ic| lccs ll t:ul, |c cscs ;:c o:l, t|osc cscs,
i: t|c wo:st :ti:g clss, t|c iollowi:g lics
41
ior
2 11 1 11.
I|c:cio:c, wc c: siulii, t|c :cltio: |ovc s iollows
Pietra Index
41
41
ior
.
Kolmogorov-Smirnov Test for the Pietra Index
As c: |c :ovc:, it is lso ossi|lc to i:tc::ct t|c lict: l:ccx s t|c uxi
uuu ciiic:c:cc |ctwcc: t|c cuuultivc i:cquc:c, cist:i|utio:s oi gooc :c
|c cscs
Pietra Index max 1
qood
cni
1
/od
cni
_
.
l:tc::cti:g t|c lict: l:ccx s t|c uxiuuu ciiic:c:cc |ctwcc: t|c cuuu
ltivc i:cquc:c, cist:i|utio:s io: t|c sco:c vlucs oi gooc :c |c cscs u|cs it
ossi|lc to c:io:u sttisticl tcst io: t|c ciiic:c:ccs |ctwcc: t|csc cist:i|u
tio:s I|is is t|c loluogo:ovui::ov Icst ;l Icst, io: two i:ccc:cc:t su
lcs lowcvc:, t|is tcst o:l, ,iclcs vc:, :oug| :csults, s ll |i:cs oi ciiic:c:ccs
|ctwcc: t|c cist:i|utio: s|cs :c ctu:cc :c cvlutcc, :ot o:l, t|c ciiic:
c:ccs i: vc:gc :ti:g sco:cs io: gooc :c |c csc ;w|ic| :c csccill, :cl
cv:t to cisc:iui:to:, owc:, |ut lso ciiic:c:ccs i: v:i:cc :c t|c |ig|c:
uouc:ts oi t|c cist:i|utio:, t|t is, t|c s|c oi t|c cist:i|utio:s i: gc:c:l
I|c :ull |,ot|csis tcstcc is I|c sco:c cist:i|utio:s oi gooc :c |c cscs
:c icc:ticl I|is |,ot|csis is :c|cctcc t lcvcl ii t|c lict: l:ccx cquls o:
cxccccs t|c iollowi:g vluc
1
1

` j1 j
_
` cc:otcs t|c :uu|c: oi cscs i: t|c sulc cxui:cc :c j :cic:s to t|c
o|sc:vcc cciult :tc li t|c lict: l:ccx 1, t|c:cio:c, sig:iiic:t ciiic:c:
ccs cxist |ctwcc: t|c sco:c vlucs oi gooc :c |c cscs
I|c vlucs 1
io: t|c i:civicul sig:iiic:cc lcvcls :c listcc i: c|:t o1

84
Cf. LEE, Global Performances of Diagnostic Tests.
CAP Curve (Powercurve)
A:ot|c: io:u oi :c:csc:ttio: w|ic| is siuil: to t|c k cu:vc is t|c Al
cu:vc,
.
i: w|ic| t|c cuuultivc i:cquc:cics oi ll cscs :c lccc o: t|c x xis
i:stcc oi t|c cuuultivc i:cquc:cics oi t|c gooc cscs lo:c I|c k :c
Al cu:vcs :c icc:ticl i: tc:us oi i:io:utio: co:tc:t, ict w|ic| u:i
icsts itscli i: t|c ssocitcc cisc:iui:to:, owc: ucsu:cs ;AD io: t|c
k cu:vc, Gi:i ociiicic:t io: t|c Al cu:vc,
|:t .- |c oi t|c Al u:vc io: t|c Dt lxulc
I|c Al cu:vc c: |c i:tc::ctcc s iollows , oi t|c cscs w|ic| ctull,
cciultcc ovc: 1!uo:t| |o:izo: c: |c iou:c uo:g t|c wo:st:tcc x oi
cscs i: t|c o:tiolio l: ou: cxulc, t|is uc:s t|t :oxiutcl, 0 oi
ltc: cciults c: |c iou:c uo:g t|c wo:st:tcc !0 oi cscs i: t|c o:tiolio
;ic t|c :ti:g clsscs . to 10,, :oxiutcl, o0 oi t|c ltc: cciults c: |c
iou:c uo:g t|c wo:st 10 ;clsscs to 10,, ctc
A: iccl :ti:g :occcu:c woulc clssii, ll |c cscs ;:c o:l, t|osc cscs,
i: t|c wo:st :ti:g clss I|is :ti:g clss woulc t|c: co:ti: t|c :ccisc s|:c j
oi ll cscs, wit| j cquli:g t|c o|sc:vcc cciult :tc i: t|c sulc cxui:cc
lo: : iccl :ti:g :occcu:c, t|c Al cu:vc woulc t|us :u: i:ou oi:t ;0, 0,
to oi:t ;,1,
o
:c i:ou t|c:c to oi:t ;1,1, I|c:cio:c, t:i:gul: :c i: t|c
uc: lcit co::c: oi t|c g:| c::ot |c :cc|cc |, t|c Al cu:vc
Gini Coefficient (Accuracy Ratio, AR, Powerstat)
A gcouct:icll, ccii:cc ucsu:c oi cisc:iui:to:, owc: lso cxists io: t|c
Al cu:vc t|c Gi:i ociiicic:t
I|c Gi:i ociiicic:t is clcultcc s t|c quo

tic:t oi t|c :c w|ic| t|c Al cu:vc :c cigo:l c:closc :c t|c co::cso:c
i:g :c i: : iccl :ti:g :occcu:c
85
Cumulative Accuracy Profile.
86
i.e. the broken line in the diagram.
87
This is also frequently referred to as the Accuracy Ratio (AR) or Powerstat. Cf. LEE, Global Performances of Diagnostic Tests,
and KEENAN/SOBEHART, Performance Measures, as well as the references cited in those works.
I|c iollowi:g :cltio: lics to t|c k :c Al cu:vcs` ucsu:cs oi cis
c:iui:to:, owc: Gi:i ociiicic:t ! AD1
I|c:cio:c, t|c i:io:utio: co:ti:cc i: t|c suuu:, ucsu:cs oi cisc:iu
i:to:, owc: cc:ivcc i:ou t|c Al :c k cu:vcs is cquivlc:t
I|c t|lc |clow ;c|:t o0, lists Gi:i ociiicic:t vlucs w|ic| c: |c
tti:cc i: :cticc io: ciiic:c:t t,cs oi :ti:g uoccls
|:t o0 I,icl Vlucs |ti:cc i: l:cticc io: t|c Gi:i ociiicic:t s \csu:c oi Disc:iui:to:, lowc:
Interpretation of the Gini Coefficient using Probability Theory
41) 41
cc:otcs t|c vc:gc |solutc ciiic:c:cc i: cciult :o||ilitics io:

two cscs ::coul, sclcctcc i:ou t|c sulc, ccii:cc s
41
|
j
c
j
|
j1jc 11j|j.
w|c:c io: suuutio: ovc: ll :ti:g clsscs c :c |, t|c v:i|lcs j
c
:c j
|
:cic:
to t|c :cltivc i:cquc:c, oi t|c ssig:uc:t oi cscs to i:civicul :ti:g clsscs,
11jc :c 11j| cc:otc t|c cciult :tcs i: clsscs c :c |, t|c iollowi:g :cl
tio: is t:uc
41
2 11 1 11 Gini coeffizient.
As wc c: :c:ocucc i: scvc:l stcs, t|c iollowi:g lics to : iccl :o
cccu:c w|ic| clssiiics ll |c cscs i: t|c wo:st :ti:g clss
41
ior
2 11 1 11.
I|is uc:s t|t wc c: siulii, t|c :cltio: |ovc s iollows
Gini coeffizient
41
41
ior

.
Confidence Levels for the Gini Coefficient and AUC
As o:cciuc:sio:l ucsu:cs oi cisc:iui:to:, owc:, t|c Gi:i ociiicic:t :c
AD :c sttisticl vlucs su||cct to ::cou iluctutio:s l: gc:c:l, two :o
cccu:cs c: |c uscc to clcultc co:iicc:cc lcvcls io: t|csc vlucs
A:l,ticl cstiutio: oi co:iicc:cc lcvcls |, co:st:ucti:g co:iicc:cc |:cs
:ou:c t|c Al o: k cu:vc
-
lcu:istic cstiutio: oi co:iicc:cc lcvcls |, uc:s oi :csuli:g
-0
88
89
Cf. FAHRMEIR/HENKING/HU
LS, Vergleich von Scoreverfahren and the references cited there.

90
Cf. SOBEHART/KEENAN/STEIN, Validation methodologies.
l: t|c :l,ticl cstiutio: oi co:iicc:cc lcvcls, co:iicc:cc |:cs :c lccc
:ou:c t|c Al o: k cu:vc I|csc |:cs i:cictc t|c :c oi t|c cig:u i:
w|ic| t|c ovc:ll cu:vc is loctcc t :cccii:cc :o||ilit, ;ic t|c co:iicc:cc
lcvcl, As t|c Gi:i ociiicic:t :c AD :c ucsu:cs :c suuu:, :oc:tics
oi t|c ovc:ll cu:vc, siuult:cous co:iicc:cc |:cs :c :cic:|lc to oi:t
|scc co:iicc:cc |:cs
Wc will :ow ccuo:st:tc t|c :occss oi co:st:ucti:g co:iicc:cc |:cs
:ou:c t|c k cu:vc lo: cc| oi:t i: t|c k cu:vc, wc usc loluogo:ov
cist:i|utio: to ccii:c t|c uc: :c lowc: liuits oi t|c x :c , vlucs io: t|c
ccsi:cc co:iicc:cc lcvcl ;1q,, t|us c:cti:g :cct:glc :ou:c cc| oi:t I|c
:o||ilit, t|t t|c ovc:ll k cu:vc will |c loctcc wit|i: t|csc :cct:glcs is
;1q,
!
li:|i:g t|c outc: co::c:s oi ll co:iicc:cc :cct:glcs io:us t|c k
cu:vc c:vcloc io: t|c co:iicc:cc lcvcl ;1q,
!
l: tu::, t|c uc: :c lowc:
liuits oi t|c :uctc: AD c: |c clcultcc o: t|c |sis oi t|is c:vcloc
I|csc vlucs io:u t|c co:iicc:cc i:tc:vl io: t|c AD vluc
I|c co:iicc:cc :cct:glcs :c co:st:uctcc |, cci:g t|c vluc
1

`
p
to t|c x vlucs :c t|c vluc
1

`
p
to t|c , vlucs oi t|c oi:ts o: t|c k cu:vc `
:c `
:cic: to t|c :uu|c:

oi gooc :c |c cscs i: t|c sulc cxui:cc I|c vlucs io: 1
c: |c iou:c i:
t|c |:ow: loluogo:ov cist:i|utio: t|lc
|:t o1 loluogo:ov Dist:i|utio: I|lc io: clcctcc o:iicc:cc lcvcls
|:t o! s|ows siuult:cous co:iicc:cc |:cs :ou:c t|c k cu:vc t
t|c co:iicc:cc lcvcl ;1q,
!
-0 io: t|c cxulc uscc |c:c I|c co:iicc:cc
i:tc:vl io: t|c vluc AD ! ;clcultcc usi:g t|c sulc, is |ctwcc:
o-- :c -1.
I|c t|lc |clow ;c|:t o!, s|ows t|c co:iicc:cc i:tc:vls oi t|c :uctc:
AD clcultcc :l,ticll, usi:g siuult:cous co:iicc:cc |:cs io: v:ious
co:iicc:cc lcvcls
lcu:istic cstiutio: oi co:iicc:cc i:tc:vls io: t|c :uctc: AD is |scc
o: :csuli:g uct|ocs l: t|is :occss, l:gc :uu|c: oi su|sulcs :c c:w:
i:ou t|c cxisti:g sulc I|csc su|sulcs c: |c c:w: wit|out :clccuc:t
;cc| csc i: t|c sulc occu:s cxctl, o:cc o: :ot t ll i: su|sulc, o: wit|
:clccuc:t ;cc| csc i:ou t|c sulc c: occu: uultilc tiucs i: su|
sulc, I|c :csulti:g su|sulcs s|oulc cc| co:ti: t|c suc :uu|c: oi
cscs i: o:cc: to c:su:c sou:c cou:|ilit, I|c k cu:vc is c:w: :c
t|c :uctc: AD is clcultcc io: cc| oi t|c su|sulcs
|:t o! k u:vc wit| iuult:cous o:iicc:cc l:cs t t|c -0 lcvcl io: t|c Dt lxulc
|:t o! I|lc oi Dc: :c lowc: AD liuits io: clcctcc o:iicc:cc lcvcls i: t|c Dt lxulc
Givc: suiiicic:t :uu|c: oi su|sulcs, t|is :occcu:c ,iclcs cstiutcs oi
t|c vc:gc :c v:i:cc oi t|c AD vluc lowcvc:, t|is :occcu:c oitc: o:l,
s|ows : :c:tl, cxct AD :uctc: clcultcc i:ou t|c suc sulc, s
csccill, i: |ouogc:ous sulcs t|c AD iluctutio:s i: su|sulcs :c
:t|c: low lowcvc:, t|c :occcu:c is usciul io: sull sulcs w|c:c t|c co:
iicc:cc |:cs :c vc:, wicc cuc to t|c sull :uu|c: oi cscs
Bayesian Error Rate
As ucsu:c oi cisc:iui:to:, owc:, t|c l,csi: c::o: :tc is ccii:cc s t|c
ui:iuuu c::o: :tc occu::i:g i: t|c sulc cxui:cc ;a c::o: lus b c::o:,
l: t|is tcc|:iquc, t|c ui:iuuu is sc:c| io: uo:g ll cutoii vlucs ;t|c sco:c
vluc |c,o:c w|ic| t|c cc|to: is clssiiicc s |c,
11 min
C
p cC 1 p uC.
I|c a :c b c::o:s io: cc| cutoii vluc :c wcig|tcc wit| t|c sulc`s
cciult :tc o: its coulcuc:t ;1, lo: t|c cxulc wit| 10 :ti:g clsscs
uscc |c:c, t|c t|lc |clow ;c|:t o+, s|ows t|c a :c b c::o:s io: ll cutoii
vlucs s wcll s t|c co::cso:ci:g l,csi: c::o: :tcs io: v:ious vlucs oi
I|c l,csi: c::o: :tc uc:s t|c iollowi:g l: t|c otiuuu usc oi t|c :t
i:g uoccl, :oo:tio: 11 oi ll cscs will still |c uisclssiiicc
|:t o+ I|lc oi l,csi: l::o: ktcs io: clcctcc ulc Dciult ktcs i: t|c Dt lxulc
As t|c t|lc s|ows, o:c scvc:c c:w|c| oi usi:g t|c l,csi: c::o: :tc to
clcultc :ti:g uoccl`s cisc:iui:to:, owc: is its |cv, ccc:cc:cc o: t|c
cciult :tc i: t|c sulc cxui:cc I|c:cio:c, ci:cct cou:iso:s oi l,csi:
c::o: :tc vlucs cc:ivcc i:ou ciiic:c:t sulcs :c :ot ossi|lc l: co:t:st,
t|c ucsu:cs oi cisc:iui:to:, owc: uc:tio:cc t|us i: ;AD, t|c Gi:i oci
iicic:t :c t|c lict: l:ccx, :c i:ccc:cc:t oi t|c cciult :o||ilit, i: t|c
sulc cxui:cc
I|c l,csi: c::o: :tc is li:|cc to : otiuuu cutoii vluc w|ic| ui:i
uizcs t|c totl :uu|c: oi uisclssiiictio:s ;a c::o: lus b c::o:, i: t|c :ti:g
s,stcu lowcvc:, s t|c otiuuu lw,s occu:s w|c: :o cscs :c :c|cctcc
;a 100, b 0,, it |ccoucs clc: t|t t|c l,csi: c::o: :tc |:cl, llows
t|c ciiic:c:titcc sclcctio: oi : otiuuu cutoii vluc io: t|c low cciult :tcs
occu::i:g i: t|c vlictio: oi :ti:g uoccls
Duc to t|c v:ious costs oi a :c b c::o:s, t|c cutoii vluc cctc:ui:cc |,
t|c l,csi: c::o: :tc is :ot otiul i: |usi:css tc:us, t|t is, it cocs :ot ui:
iuizc t|c ovc:ll costs :isi:g i:ou uisclssiiictio:, w|ic| :c usull, su|st:
till, |ig|c: io: a c::o:s t|: io: b c::o:s
lo: t|c cciult :tc .0, t|c l,csi: c::o: :tc cquls cxctl, |li t|c
suu oi a :c b io: t|c oi:t o: t|c ab c::o: cu:vc w|ic| is closcst to oi:t
;0, 0, wit| :cg:c to t|c totl a :c b c::o:s ;ci c|:t o., l: t|is csc, t|c
iollowi:g is lso t:uc ;a :c b c::o:s :c cc:otcc s a :c b,
-1
11 'minc u 'max1 c u 1 'maxF
bad
cum
F
good
cum
'
'1 Pietra Index
lowcvc:, t|is cquivlc:cc oi t|c l,csi: c::o: :tc to t|c lict: l:ccx o:l,
lics w|c:c .0
-!
91
The Bayesian error rate 11 is defined at the beginning of the equation for the case where p 50%. The error values a and b
are related to the frequency distributions of good and bad cases, which are applied in the second to last expression. The last
expression follows from the representation of the Pietra Index as the maximum difference between these frequency distributions.
92
|:t o. l:tc::cttio: oi t|c l,csi: l::o: ktc s t|c lowcst vc:ll l::o: w|c:c .0
Entropy-Based Measures of Discriminatory Power
I|csc ucsu:cs oi cisc:iui:to:, owc: sscss t|c i:io:utio: gi:cc |, usi:g
t|c :ti:g uoccl l: t|is co:tcxt, i:io:utio: is ccii:cc s vluc w|ic| is
ucsu:|lc i: |solutc tc:us :c w|ic| cquls t|c lcvcl oi |:owlccgc |out
iutu:c cvc:t
lct us ii:st ssuuc t|t t|c vc:gc cciult :o||ilit, oi ll cscs i: t|c scg
uc:t i: qucstio: is u:|:ow: li wc loo| t : i:civicul csc i: t|is scc::io
wit|out |ci:g |lc to cstiutc its c:ccit qulit, usi:g :ti:g uoccls o: ot|c:
ssuutio:s, wc co :ot osscss :, i:io:utio: |out t|c ;gooc o: |c, iutu:c
cciult sttus oi t|c csc I|c uxiuuu i: t|is scc::io is t|c i:io:utio: :
o|sc:vc: gi:s |, witi:g io: t|c iutu:c sttus
li, |owcvc:, t|c vc:gc :o||ilit, oi c:ccit cciult is |:ow:, t|c i:io:
utio: gi:cc |, ctull, o|sc:vi:g t|c iutu:c sttus oi t|c csc is lowc: i: t|is
scc::io cuc to t|c :cviousl, vil|lc i:io:utio:
I|csc co:sicc:tio:s lcc to t|c ccii:itio: oi t|c i:io:utio: c:t:o,
vluc, w|ic| is :c:csc:tcc s iollows io: cic|otouous cvc:ts wit| :o||ilit,
oi occu::c:cc io: t|c 1 cvc:t ;i: t|is csc t|c c:ccit cciult,
H
0
fj log
2
j 1 j log
2
1 jg
H
0
:cic:s to t|c |solutc i:io:utio: vluc w|ic| is :cqui:cc i: o:cc: to cctc:
ui:c t|c iutu:c cciult sttus, o: co:vc:scl, t|c i:io:utio: vluc w|ic| is
gi:cc |, o|sc:vi:g t|c c:ccit cciult:o c:ccit cciult cvc:t I|us c:t:o,
c: lso |c i:tc::ctcc s ucsu:c oi u:cc:ti:t, s to t|c outcouc oi :
cvc:t
H
0
:cc|cs its uxiuuu vluc oi 1 w|c: .0, t|t is, w|c: cciult :c
:o:cciult :c cqull, :o||lc H
0
cquls zc:o w|c: j t|cs t|c vluc 0 o: 1,
t|t is, t|c iutu:c cciult sttus is l:cc, |:ow: wit| cc:ti:t, i: cv:cc
o:citio:l c:t:o, is ccii:cc wit| co:citio:l :o||ilitics jjc i:stcc oi
|solutc :o||ilitics j, t|c co:citio:l :o||ilitics :c |scc o: co:citio: c
lo: t|c u:osc oi vlicti:g :ti:g uoccls, t|c co:citio: i: t|c ccii:itio: oi
co:citio:l c:t:o, is t|c clssiiictio: i: :ti:g clss c :c cciult cvc:t to |c
ccictcc 1 lo: cc| :ti:g clss c, t|c co:citio:l c:t:o, is /
c
/
c
fj1jc log
2
j1jc 1 j1jc log
2
1 j1jcg.
I|c co:citio:l c:t:o, /
c
oi :ti:g clss t|us co::cso:cs to t|c u:cc:
ti:t, :cui:i:g wit| :cg:c to t|c iutu:c cciult sttus itc: csc is ssig:cc
to :ti:g clss Ac:oss ll :ti:g clsscs i: uoccl, t|c co:citio:l c:t:o, H
1
;vc:gcc usi:g t|c o|sc:vcc i:cquc:cics oi t|c i:civicul :ti:g clsscs` j
c
, is
ccii:cc s
H
1

c
j
c
/
c
.
I|c vc:gc co:citio:l c:t:o, l1 co::cso:cs to t|c u:cc:ti:t, :cui:
i:g wit| :cg:c to t|c iutu:c cciult sttus itc: lictio: oi t|c :ti:g uoccl
Dsi:g t|c c:t:o, H
0
, w|ic| is vil|lc wit|out l,i:g t|c :ti:g uoccl ii
t|c vc:gc cciult :o||ilit, oi t|c sulc is |:ow:, it is ossi|lc to ccii:c
:cltivc ucsu:c oi t|c i:io:utio: gi:cc cuc to t|c :ti:g uoccl I|c co:
citio:l i:io:utio: c:t:o, :tio ;llk, is ccii:cc s
-!
C111
H
0
H
1
H
0
1
H
1
H
0
.
I|c vluc llk c: |c i:tc::ctcc s iollows
li :o ccitio:l i:io:utio: is gi:cc |, l,i:g t|c :ti:g uoccl, H
1
H
0
:c C111 0
li t|c :ti:g uoccl is iccl :c :o u:cc:ti:t, :cui:s :cg:ci:g t|c cciult
sttus itc: t|c uoccl is licc, H
1
0 :c C111 1
I|c |ig|c: t|c llk vluc is, t|c uo:c i:io:utio: :cg:ci:g t|c iutu:c
cciult sttus is gi:cc i:ou t|c :ti:g s,stcu
lowcvc:, it s|oulc |c :otcc t|t i:io:utio: o: t|c :oc:tics oi t|c :ti:g
uoccl is lost i: t|c clcultio: oi llk, s is t|c csc wit| AD :c t|c ot|c:
o:cciuc:sio:l ucsu:cs oi cisc:iui:to:, owc: As : i:civicul i:cicto:,
t|c:cio:c, llk |s o:l, liuitcc uc:i:g i: t|c sscssuc:t oi :ti:g uoccl
|:t oo l:t:o,lscc \csu:cs oi Disc:iui:to:, lowc: io: t|c Dt lxulc
93
The difference H
0
H
1
is also referred to as the Kullback-Leibler distance. Therefore, CIER is a standardized Kullback-
Leibler distance.
I|c t|lc |clow ;c|:t o, s|ows cou:iso: oi Gi:i ociiicic:t vlucs
:c llk cisc:iui:to:, owc: i:cicto:s i:ou stuc, oi :ti:g uoccls io:
Auc:ic: co:o:tcs
|:t o Gi:i ociiicic:t :c llk Vlucs i:ou tuc, oi Auc:ic: o:o:tcs
-+
6.2.2 Back-Testing the Calibration
I|c ssig:uc:t oi cciult :o||ilitics to :ti:g uoccl`s outut is :cic::cc to
s cli|:tio: I|c qulit, oi cli|:tio: ccc:cs o: t|c ccg:cc to w|ic| t|c
cciult :o||ilitics :ccictcc |, t|c :ti:g uoccl utc| t|c cciult :tcs
ctull, :clizcc I|c:cio:c, :cvicwi:g t|c cli|:tio: oi :ti:g uoccl is i:c
quc:tl, :cic::cc to s |c|tcsti:g
I|c |sic ct uscc io: |c|tcsti:g :c t|c cciult :o||ilitics io:ccst
ovc: :ti:g clss io: scciiic tiuc |o:izo: ;usull, 1! uo:t|s,, t|c :uu|c:
oi cscs ssig:cc to t|c :cscctivc :ti:g clss |, t|c uoccl, :c t|c cciult st
tus oi t|osc cscs o:cc t|c io:ccsti:g c:ioc |s clscc, st:ti:g i:ou t|c tiuc
oi :ti:g ;ic usull, 1! uo:t|s itc: t|c :ti:g ws ssig:cc, li|:tio:
i:volvcs ssig:i:g io:ccst cciult :o||ilitics to t|c i:civicul :ti:g clsscs
;ci scctio: .!, l: t|is :occss, it is lso ossi|lc to usc lo:gc: io:ccsti:g |o:i
zo:s t|: t|c 1!uo:t| |o:izo: :cqui:cc oi lkl |:|s, t|csc ot|c: tiuc |o:i
zo:s lso |vc to u:cc:go |c|tcsti:g
I|c :csults oi v:ious scguc:tscciiic :ti:g :occcu:cs :c i:cquc:tl,
ccictcc o: u:iio:u ustc: sclc oi cciult :o||ilitics
l: t|c cou:sc oi qu:tittivc vlictio:, sig:iiic:t ciiic:c:ccs u, |c icc:
tiiicc |ctwcc: t|c cciult :tcs o: t|c ustc: sclc :c t|c cciult :tcs ctull,
:clizcc io: i:civicul :ti:g clsscs i: scguc:tscciiic :ti:g :occcu:c l:
o:cc: to co::cct t|csc ccvitio:s, two ciiic:c:t :oc|cs :c ossi|lc
l: iixcc ustc: sclc, t|c :cccii:cc cciult :o||ilitics :c :ot c|:gcc,
i:stcc, o:l, t|c ssig:uc:t oi :csults i:ou t|c :ti:g :occcu:c u:cc:
:cvicw to :ti:g clsscs o: t|c ustc: sclc is c|ustcc
l: v:i|lc ustc: sclc, t|c :cccii:cc cciult :o||ilitics :c c|:gcc,
|ut t|c ssig:uc:t oi :ti:g :csults i:ou t|c :ti:g :occcu:c u:cc: :cvicw
to :ti:g clsscs o: t|c ustc: sclc is :ot c|ustcc
As :, c|:gcs to t|c ustc: sclc will iicct ll oi t|c :ti:g :occcu:cs
uscc i: |:| i:cluci:g t|osc io: w|ic| :o ;o: o:l, ui:o:, c::o:s i: cli|:
tio: |vc |cc: icc:tiiicc iixcc ustc: sclcs :c gc:c:ll, :cic:|lc I|is is
csccill, t:uc i: cscs w|c:c t|c cciult :o||ilit, oi :ti:g clsscs sc:vcs s
t|c |sis io: :is||scc :ici:g, w|ic| woulc |c su||cct to i:cquc:t c|:gcs ii
v:i|lc ustc: sclc wc:c uscc
94
Cf. KEENAN/SOBEHART, Performance Measures.
lowcvc:, c|:gcs to t|c ustc: sclc :c still c:uissi|lc uc| c|:gcs
uig|t |c :cccss:, i: cscs w|c:c :cw :ti:g :occcu:cs :c to |c i:tcg:tcc
o: ii:c::oug|c: clssiiictio:s :c :cqui:cc io: cciult :o||ilitics i: cc:ti:
vluc ::gcs lowcvc:, it is lso :cccss:, to c:su:c t|t ct |isto:, :cco:cs
lw,s i:clucc :ti:g clss`s cciult :o||ilit,, t|c :ti:g :csult itscli, :c
t|c ccou:,i:g cciult :o||ilit, i: ccitio: to t|c :ti:g clss
|:t o s|ows t|c io:ccst :c :clizcc cciult :tcs i: ou: cxulc wit|
tc: :ti:g clsscs I|c vc:gc :clizcc cciult :tc io: t|c ovc:ll sulc is
1!, w|c:cs t|c io:ccst |scc o: t|c i:cquc:c, wit| w|ic| t|c i:civicul
:ti:g clsscs wc:c ssig:cc s wcll s t|ci: :cscctivc cciult :o||ilitics ws
10 I|c:cio:c, t|is :ti:g uoccl u:cc:cstiutcc t|c ovc:ll cciult :is|
|:t o ou:iso: oi lo:ccst :c kclizcc Dciult ktcs i: t|c Dt lxulc
Brier Score
I|c vc:gc quc:tic ccvitio: oi t|c cciult :tc io:ccst io: cc| csc oi t|c
sulc cxui:cc i:ou t|c :tc :clizcc i: t|t csc ;1 io: cciult, 0 io: :o
cciult, is |:ow: s t|c l:ic: co:c
-.
1o
1
`
`
i1
j
)oicco:t
i
y
i
2
where y
i
1 for default in n
0 for no default in n
_
l: t|c csc cxui:cc |c:c, w|ic| is civiccc i:to :ti:g clsscs, t|c l:ic:
co:c c: lso |c :c:csc:tcc s t|c totl io: ll :ti:g clsscs c
1o
1
`
1
c1
`
/
j
o/:ci.cd
c
1 j
)oicco:t
c

2
1 j
o/:ci.cd
c
j
)oicco:t
c

2
_
l: t|c cqutio: |ovc, `
c
cc:otcs t|c :uu|c: oi cscs :tcc i: :ti:g clss c,
w|ilc j
o/:ci.cd
:c j
)oicco:t
:cic: to t|c :clizcc cciult :tc :c t|c io:ccst
cciult :tc ;|ot| io: :ti:g clss c, I|c ii:st tc:u i: t|c suu :cilccts t|c
cciults i: clss c, :c t|c scco:c tc:u s|ows t|c :o:cciultcc cscs I|is
l:ic: co:c cqutio: c: |c :cw:ittc: s iollows
1o
1
`
1
c1
`
c
j
o/:ci.cd
c
1 j
o/:ci.cd
c
j
)oicco:t
c
j
o/:ci.cd
c

2
_
95
Cf. BRIER, G. W., Brier-Score.
I|c lowc: t|c l:ic: co:c is, t|c |cttc: t|c cli|:tio: oi t|c :ti:g uoccl
is lowcvc:, it is lso ossi|lc to civicc t|c l:ic: co:c i:to t|:cc couo:c:ts,
o:l, o:c oi w|ic| is ci:cctl, li:|cc to t|c ccvitio:s oi :cl cciult :tcs i:ou
t|c co::cso:ci:g io:ccsts
-o
I|c cv:tgc oi t|is civisio: is t|t t|c cssc:til
:oc:tics oi t|c l:ic: co:c c: |c sc:tcc
1o j
o/:ci.cd
1 j
o/:ci.cd
..
Uncertainty,variation
1
`
1
c1
`
c
j
)oicco:t
c
j
o/:ci.cd
c

2
_
..
Calibration,reliability
1
`
1
c1
`
c
j
o/:ci.cd
j
o/:ci.cd
c
_ _
2
_ _
..
Resolution
I|c ii:st tc:u 1o
ic)
j
o/:ci.cd
1 j
o/:ci.cd
ccsc:i|cs t|c v:i:cc oi t|c
cciult :tc o|sc:vcc ovc: t|c c:ti:c sulc j
o/:ci.cd
I|is vluc is i:ccc:c
c:t oi t|c :ti:g :occcu:c`s cli|:tio: :c ccc:cs o:l, o: t|c o|sc:vcc su
lc itscli lt :c:csc:ts t|c ui:iuuu l:ic: co:c tti:|lc io: t|is sulc wit|
c:icctl, cli|:tcc |ut lso trivial rating model w|ic| io:ccsts t|c o|sc:vcc
cciult :tc :cciscl, io: cc| csc |ut o:l, cou:iscs o:c :ti:g clss low
cvc:, t|c t:ivil :ti:g uoccl cocs :ot ciiic:c:titc |ctwcc: uo:c o: lcss gooc
cscs :c is t|c:cio:c u:suit|lc s :ti:g uoccl u:cc: t|c :cqui:cuc:ts oi t|c
lkl :oc|
I|c scco:c tc:u
1
`
1
c1
`
c
j
)oicco:t
c
j
o/:ci.cd
c
_ _
2
_ _
:c:csc:ts t|c vc:gc quc:tic ccvitio: oi io:ccst :c :clizcc cciult :tcs
i: t|c :ti:g clsscs Awcllcli|:tcc :ti:g uoccl will s|ow lowc: vlucs io:
t|is tc:u t|: oo:l, cli|:tcc :ti:g uoccl I|c vluc itscli is t|us lso
:cic::cc to s t|c cli|:tio:
I|c t|i:c tc:u
1
`
1
c/1
`
c
j
)oicco:t
j
o/:ci.cd
c
_ _
2
_ _
ccsc:i|cs t|c vc:gc quc:tic ccvitio: oi o|sc:vcc cciult :tcs i: i:civicul
:ti:g clsscs i:ou t|c cciult :tc o|sc:vcc i: t|c ovc:ll sulc I|is vluc is
:cic::cc to s :csolutio: W|ilc t|c :csolutio: oi t|c t:ivil :ti:g uoccl is
zc:o, it is :ot cqul to zc:o i: cisc:iui:ti:g :ti:g s,stcus l: gc:c:l, t|c :cs
olutio: oi :ti:g uoccl :iscs s :ti:g clsscs wit| clc:l, ciiic:c:titcc
o|sc:vcc cciult :o||ilitics :c cccc kcsolutio: is t|us li:|cc to t|c cis
c:iui:to:, owc: oi :ti:g uoccl
I|c ciiic:c:t sig:s :cccci:g t|c cli|:tio: :c :csolutio: tc:us u|c it
uo:c ciiiicult to i:tc::ct t|c l:ic: co:c s : i:civicul vluc io: t|c u:osc
oi sscssi:g t|c clssiiictio: ccu:c, oi :ti:g uoccl`s cli|:tio: l: cci
tio:, t|c :uuc:icl vlucs oi t|c cli|:tio: :c :csolutio: tc:us :c gc:c:ll,
i: lowc: t|: t|c v:i:cc I|c t|lc |clow ;c|:t o-, s|ows t|c vlucs oi t|c
l:ic: co:c :c its couo:c:ts io: t|c cxulc uscc |c:c
96
Cf. MURPHY, A. H., Journal of Applied Meteorology.
|:t o- lcultio: oi l:ic: co:c io: t|c Dt lxulc
l: :cticc, st:c:cizcc ucsu:c |:ow: s t|c l:ic: |ill co:c ;l, is
oitc: uscc i:stcc oi t|c l:ic: co:c I|is ucsu:c sclcs t|c l:ic: co:c to t|c
v:i:cc tc:u
1oo 1
1o
j
o/:ci.cd
1 j
o/:ci.cd
.
l: t|c t:ivil, iccl uoccl, t|c l:ic: |ill co:c t|cs t|c vluc zc:o lo: t|c
cxulc |ovc, t|c :csulti:g vluc is l ~ +0+
Reliability Diagrams
Accitio:l i:io:utio: o: t|c qulit, oi cli|:tio: io: :ti:g uoccls c: |c
cc:ivcc i:ou t|c :cli|ilit, cig:u, i: w|ic| t|c o|sc:vcc cciult :tcs :c
lottcc gi:st t|c io:ccst :tc i: cc| :ti:g clss I|c :csulti:g cu:vc is oitc:
:cic::cc to s t|c cli|:tio: cu:vc
|:t 0 kcli|ilit, Dig:u io: t|c Dt lxulc
|:t 0 s|ows t|c :cli|ilit, cig:u io: t|c cxulc uscc |c:c l: t|c
illust:tio:, cou|lc log:it|uic :c:csc:ttio: ws sclcctcc |ccusc t|c
cciult :o||ilitics :c vc:, closc togct|c: i: t|c gooc :ti:g clsscs i: :tic
ul: :otc t|t t|c oi:t io: :ti:g clss 1 is uissi:g i: t|is g:| I|is is
|ccusc :o cciults wc:c o|sc:vcc i: t|t clss
I|c oi:ts oi wcllcli|:tcc s,stcu will ill closc to t|c cigo:l i: t|c
:cli|ilit, cig:u l: : iccl s,stcu, ll oi t|c oi:ts woulc lic ci:cctl, o: t|c
cigo:l I|c cli|:tio: tc:u oi t|c l:ic: co:c :c:csc:ts t|c vc:gc
;wcig|tcc wit| t|c :uu|c:s oi cscs i: cc| :ti:g clss, squ:cc ccvitio:
oi oi:ts o: t|c cli|:tio: cu:vc i:ou t|c cigo:l I|is vluc s|oulc |c s
low s ossi|lc
I|c :csolutio: oi :ti:g uoccl is i:cictcc |, t|c vc:gc ;wcig|tcc wit|
t|c :uu|c:s oi cscs i: t|c i:civicul :ti:g clsscs, squ:cc ccvitio: oi oi:ts
i: t|c :cli|ilit, cig:u i:ou t|c |:o|c: li:c, w|ic| :c:csc:ts t|c cciult :tc
o|sc:vcc i: t|c sulc I|is vluc s|oulc |c s |ig| s ossi|lc, w|ic| uc:s
t|t t|c cli|:tio: cu:vc s|oulc |c s stcc s ossi|lc lowcvc:, t|c stcc:css
oi t|c cli|:tio: cu:vc is :iu:il, cctc:ui:cc |, t|c :ti:g uoccl`s cisc:iu
i:to:, owc: :c is i:ccc:cc:t oi t|c ccu:c, oi cciult :tc cstiutcs
A: iccl t:ivil :ti:g s,stcu wit| o:l, o:c :ti:g clss woulc |c :c:c
sc:tcc i: t|c :cli|ilit, cig:u s : isoltcc oi:t loctcc t t|c i:tc:scctio:
oi t|c cigo:l :c t|c cciult :o||ilit, oi t|c sulc
li|c cisc:iui:to:, owc: ucsu:cs, o:cciuc:sio:l i:cicto:s io: cli
|:tio: :c :csolutio: c: lso |c ccii:cc s st:c:cizcc ucsu:cs oi t|c :c
|ctwcc: t|c cli|:tio: cu:vc :c t|c cigo:l o: t|c sulc cciult :tc
-
Checking the Significance of Deviations in the Default Rate
l: lig|t oi t|c ict t|t :clizcc cciult :tcs :c su||cct to sttisticl iluctutio:s,
it is :cccss:, to ccvclo i:cicto:s to s|ow |ow wcll t|c :ti:g uoccl csti
utcs t|c :uctc: lD l: gc:c:l, two :oc|cs c: |c t|c:
Assuutio: oi u:co::cltcc cciult cvc:ts
o:sicc:tio: oi cciult co::cltio:
lui:icl stucics s|ow t|t cciult cvc:ts :c gc:c:ll, :ot u:co::cltcc
I,icl vlucs oi cciult co::cltio:s ::gc |ctwcc: 0. :c ! Dciult co:
:cltio:s w|ic| :c :ot cqul to zc:o |vc t|c ciicct oi st:c:gt|c:i:g iluctu
tio:s i: cciult :o||ilitics I|c tolc::cc ::gcs io: t|c ccvitio: oi :clizcc
cciult :tcs i:ou cstiutcc vlucs u, t|c:cio:c |c su|st:till, l:gc: w|c:
cciult co::cltio:s :c t|c: i:to ccou:t l: o:cc: to c:su:c co:sc:vtivc csti
utcs, t|c:cio:c, it is :cccss:, to :cvicw t|c cli|:tio: u:cc: t|c i:itil
ssuutio: oi u:co::cltcc cciult cvc:ts
I|c sttisticl tcst uscc |c:c c|cc|s t|c :ull |,ot|csis I|c io:ccst cciult
:o||ilit, i: :ti:g clss is co::cct gi:st t|c ltc::tivc |,ot|csis I|c
io:ccst cciult :o||ilit, is i:co::cct usi:g t|c ct vil|lc io: |c|tcsti:g
I|is tcst c: |c o:csiccc ;c|cc|i:g o:l, io: sig:iiic:t ovc::u:s oi t|c io:ccst
cciult :tc, o: twosiccc ;c|cc|i:g io: sig:iiic:t ovc::u:s :c u:cc::u:s oi
t|c io:ccst cciult :o||ilit,, l:ou u:gcuc:t st:coi:t, |ot| sig:iii
c:t u:cc:cstiutcs :c ovc:cstiutcs oi :is| :c :clcv:t A o:csiccc tcst c:
97
See also HASTIE/TIBSHIRANI/FRIEDMAN, Elements of statistical learning.
lso |c uscc to c|cc| io: :is| u:cc:cstiutcs :csiccc :c twosiccc tcsts
c: lso |c co:vc:tcc i:to o:c :ot|c:
-
Calibration Test using Standard Normal Distribution
:c siulc tcst io: t|c cli|:tio: oi cciult :tcs u:cc: t|c ssuutio: oi
u:co::cltcc cciult cvc:ts uscs st:c:c :o:ul cist:i|utio:
--
l: t|c io:uuls
|clow,
1
cc:otcs t|c i:vc:sc cuuultivc cist:i|utio: iu:ctio: io: t|c st:c:c
:o:ul cist:i|utio:, `
c
st:cs io: t|c :uu|c: oi cscs i: :ti:g clss c, :c j
c
:cic:s to t|c cciult :tc
;o:csiccc tcst, li
_
j
o/:ci.cd
c
j
)oicco:t
c
_

1

j
)oicco:t
c
1 j
)oicco:t
c

`
c
.
t|c cciult :tc i: clss c is sig:iiic:tl, u:cc:cstiutcc t t|c co:iicc:cc
lcvcl
;o:csiccc tcst, li
_
j
jioqio:c
c
j
o/:ci.cd
c
_

1

j
)oicco:t
c
1 j
)oicco:t
c

`
c
.
t|c cciult :tc i: clss c is sig:iiic:tl, ovc:cstiutcc t t|c co:iicc:cc lcvcl
;twosiccc tcst, li
j
o/:ci.cd
c
j
)oicco:t
c

1
1
2
_ _
j
)oicco:t
c
1 j
)oicco:t
c

`
c
.
t|c cciult :tc i: clss c is sig:iiic:tl, uiscstiutcc t co:iicc:cc lcvcl
I|c t|lc |clow ;c|:t 1, s|ows t|c :csults oi t|c o:csiccc tcst io: :is|
u:cc:cstiutcs ig:iiic:t ovc::u:s oi t|c io:ccst cciult :tcs :c s|ccc i:
g:, io: i:civicul sig:iiic:cc lcvcls I|c cciult :tcs i: clsscs . to wc:c
sig:iiic:tl, u:cc:cstiutcc t lcvcl oi -., w|ilc t|c cciult :tcs i: clsscs
- :c 10 wc:c o:l, u:cc:cstiutcc t t|c -0 lcvcl I|c vc:gc cciult :o|
|ilit, oi t|c ovc:ll sulc ws u:cc:cstiutcc cvc: t t|c lcvcl oi ---
100
I|is s|ows t|t |ig|l, sig:iiic:t uiscstiutc oi t|c vc:gc cciult :tc
io: t|c c:ti:c sulc c: :isc cvc: ii t|c cciult :tcs i: t|c i:civicul clsscs
:cui: wit|i: t|ci: tolc::cc ::gcs I|is is cuc to t|c i:clusio: oi t|c :uu|c:
oi cscs ` i: t|c cc:oui:to: oi t|c tcst sttistic, t|is :uu|c: :ccuccs t|c tcst
sttistic w|c: ll :ti:g clsscs :c cou|i:cc, t|us u|i:g t|c tcst uo:c sc:si
tivc
98
The limit of a two-sided test at level q is equal to the limit of a one-sided test at the level ! 1. If overruns/underruns are
also indicated in the two-sided test by means of the plus/minus signs for differences in default rates, the significance levels will
be identical.
99
Cf. CANTOR, R./FALKENSTEIN, E., Testing for rating consistencies in annual default rates.
100
The higher the significance level q is, the more statistically certain the statement is; in this case, the statement is the rejection of
the null hypothesis asserting that PD is estimated correctly. The value (1-q) indicates the probability that this rejection of the
null hypothesis is incorrect, that is, the probability that an underestimate of the default probability is identified incorrectly.
|:t 1 lcc:tiiictio: oi ig:iiic:t Dcvitio:s i: li|:tio: i: t|c Dt lxulc
;Icst wit| t:c:c :o:ul Dist:i|utio:,
lo: t|c u:osc oi i:tc::cti:g co:iicc:cc lcvcls, t:iiic lig|ts :oc|
|s |cc: :ooscc io: :cticc i: Gc:u:,
101
l: t|is :oc|, ccvitio:s oi
:clizcc :c io:ccst cciult :tcs |clow co:iicc:cc lcvcl oi -. s|oulc
:ot |c :cg:ccc s sig:iiic:t ;g:cc: ::gc, Dcvitio:s t co:iicc:cc lcvcl
oi t lcst --- :c t|c: co:sicc:cc sig:iiic:t :c s|oulc ccii:itcl, |c co:
:cctcc ;:cc ::gc, Dcvitio:s w|ic| :c sig:iiic:t t co:iicc:cc lcvcls
|ctwcc: -. :c --- u, :ccc to |c co::cctcc ;,cllow ::gc,
lo: t|c cxulc |ovc, t|is uc:s t|t t|c ovc:ll cciult :tc w|ic| ws
u:cc:cstiutcc |, t|c :ti:g uoccl s|oulc |c co::cctcc uw:c, :cic:|l,
|, u|i:g t|c :o:itc c|ustuc:ts i: :ti:g clsscs . to
Binomial Calibration Test
I|c tcst usi:g :o:ul cist:i|utio: ;ccsc:i|cc |ovc, is gc:c:liztio: oi t|c
|i:ouil tcst io: i:cquc:cics oi u:co::cltcc |i::, cvc:ts I|c |i:ouil tcst
is ccsc:i|cc i: cctil |clow
lo: low cciult :o||ilitics :c low :uu|c:s oi cscs i: t|c i:civicul
:ti:g clsscs, t|c :c:cquisitcs io: usi:g :o:ul cist:i|utio: :c :ot lw,s
uct I|c t|lc |clow ;c|:t !, lists t|c ui:iuuu :uu|c: oi cscs :cqui:cc
io: sou:c :oxiutio: oi tcst vlucs wit| st:c:c :o:ul cist:i|utio:
w|c: tcsti:g v:ious cciult :o||ilitics
10!
li i:civicul clsscs co:ti: icwc: cscs t|: t|c ui:iuuu :uu|c: i:ci
ctcc, t|c |i:ouil tcst s|oulc |c c::icc out l: t|c io:uul |clow, `
c
cc:otcs t|c :uu|c: oi cciults o|sc:vcc i: clss c, :c `
c
:cic:s to t|c :uu|c:
oi cscs i: clss c uuutio: is c:io:ucc io: ll cciults i: clss c
;o:csiccc tcst, li
c
i0
`
c
i
_ _
j
)oicco:t
c

i
1 j
)oicco:t
`
c
i
.
t|c cciult :tc i: clss c is sig:iiic:tl, u:cc:cstiutcc t co:iicc:cc lcvcl
10!
101
Cf. TASCHE, D., A traffic lights approach to PD validation.
102
The strict condition for the application of standard normal distribution as an approximation of binomial distribution is
`
j
1j 9, where N is the number of cases in the rating class examined and j is the forecast default probability (cf.
SACHS, L., Angewandte Statistik, p. 283).
103
This is equivalent to the statement that the probability of occurrence 1i < `
/
jj
jioqio:c
/
; `
/
(assumed to be binomially
distributed) of a maximum of `
c
defaults among the `
c
cases in class c must not be greater than q.
|:t ! I|co:cticl \i:iuuu :uu|c: oi scs io: t|c :o:ul Icst |scc o: V:ious Dciult ktcs
I|c t|lc |clow ;c|:t !, s|ows t|c :csults oi t|c |i:ouil tcst io: sig:ii
ic:t u:cc:cstiutcs oi t|c cciult :tc lt is i:cccc co:sicuous t|t t|c :csults
l:gcl, utc| t|osc oi t|c tcst usi:g :o:ul cist:i|utio: ccsitc t|c ict t|t
scvc:l clsscs cic :ot co:ti: t|c :cqui:cc ui:iuuu :uu|c: oi cscs
|:t ! lcc:tiiictio: oi ig:iiic:t Dcvitio:s i: li|:tio: io: t|c Dt lxulc ;li:ouil Icst,
:c i:tc:csti:g ccvitio: c:s i: :ti:g clss 1, w|c:c t|c |i:ouil tcst
,iclcs sig:iiic:t u:cc:cstiutc t t|c -. lcvcl io: : cstiutcc cciult :o|
|ilit, oi 00. :c :o o|sc:vcc cciults l: t|is csc, t|c |i:ouil tcst cocs
:ot ,iclc :cli|lc :csults, s t|c iollowi:g l:cc, lics w|c: :o cciults :c
o|sc:vcc
1 i 0jj
jioqio:c
1
; `
1
_
1 j
jioqio:c
1

`
1
90%.
l: gc:c:l, t|c tcst usi:g :o:ul cist:i|utio: is istc: :c csic: to c:io:u,
:c it ,iclcs usciul :csults cvc: io: sull sulcs :c low cciult :tcs I|is tcst
is t|us :cic:|lc to t|c |i:ouil tcst cvc: ii t|c ut|cuticl :c:cquisitcs io:
its lictio: :c :ot lw,s uct lowcvc:, it is iuo:t:t to |c: i: ui:c t|t
t|c |i:ouil tcst :c its gc:c:liztio: usi:g :o:ul cist:i|utio: :c |scc o:
t|c ssuutio: oi u:co::cltcc cciults A tcst :occcu:c w|ic| t|cs cciult
co::cltio:s i:to ccou:t is :csc:tcc |clow
Calibration Test Procedure Based on Default Correlation
I|c ssuutio: oi u:co::cltcc cciults gc:c:ll, ,iclcs : ovc:cstiutc oi t|c
sig:iiic:cc oi ccvitio:s i: t|c :clizcc cciult :tc i:ou t|c io:ccst :tc I|is
is csccill, t:uc oi :is| u:cc:cstiutcs, t|t is, cscs i: w|ic| t|c :clizcc
cciult :tc is |ig|c: t|: t|c io:ccst :tc l:ou co:sc:vtivc :is| sscssuc:t
st:coi:t, ovc:cstiuti:g sig:iiic:cc is :ot c:iticl i: t|c csc oi :is| u:cc:
cstiutcs, w|ic| uc:s t|t it is c:ti:cl, ossi|lc to oc:tc u:cc: t|c ssuu
tio: oi u:co::cltcc cciults l: :, csc, |owcvc:, c:sistc:t ovc:cstiutcs oi
sig:iiic:cc will lcc to uo:c i:cquc:t :ccli|:tio: oi t|c :ti:g uoccl, w|ic|
c: |vc :cgtivc ciiccts o: t|c uoccl`s st|ilit, ovc: tiuc lt is t|c:cio:c :cc
css:, to cctc:ui:c t lcst t|c :oxiutc cxtc:t to w|ic| cciult co::cl
tio:s i:iluc:cc lD cstiutcs
Dciult co::cltio:s c: |c uocclcc o: t|c |sis oi t|c ccc:cc:cc oi
cciult cvc:ts o: couuo: :c i:civicul ::cou icto:s
10+
lo: co::cltcc
cciults, t|is uoccl lso u|cs it ossi|lc to cc:ivc liuits io: sscssi:g ccvi
tio:s i: t|c :clizcc cciult :tc i:ou its io:ccst s sig:iiic:t t cc:ti: co:
iicc:cc lcvcls
l: t|c :oxiutio: io:uul |clow, cc:otcs t|c co:iicc:cc lcvcl ;cg
-. o: ---,, `
c
t|c :uu|c: oi cscs o|sc:vcc c: :ti:g clss, j
/
t|c cciult
:tc c: :ti:g clss, t|c cuuultivc st:c:c :o:ul cist:i|utio:, c t|c :o|
|ilit, cc:sit, iu:ctio: oi t|c st:c:c :o:ul cist:i|utio:, :c , t|c cciult
co::cltio:
;o:csiccc tcst, li
j
o/:ci.cd
c
Q
1
2`
c
2Q 1
Q1Q
c
,
1
1t
1,
p
_
_ _
12,
1
1t

,
p
,1,
p
_ _
_
_
_
_
_
_
_
_
t|c cciult :tc i: clss c is sig:iiic:tl, u:cc:cstiutcc t t|c co:iicc:cc lcvcl
l: t|is co:tcxt, t
1
j
)oicco:t
c
; Q
1
_

,
p

1
t
1,
p
_
I|c tcst |ovc c: |c uscc to c|cc| io: ovc:cstiutcs oi t|c cciult :tc i:
i:civicul :ti:g clsscs s wcll s t|c ovc:ll sulc
10.
I|c t|lc |clow ;c|:t +, cou:cs t|c :csults oi t|c cli|:tio: tcst u:cc:
t|c ssuutio: oi u:co::cltcc cciults wit| t|c :csults |scc o: cciult co:
:cltio: oi 001 A ccvitio: i: t|c :clizcc cciult :tc i:ou t|c io:ccst :tc is
co:sicc:cc sig:iiic:t w|c:cvc: t|c :clizcc cciult :tc cxccccs t|c uc:
liuit i:cictcc io: t|c :cscctivc co:iicc:cc lcvcl
|:t + lcc:tiiictio: oi ig:iiic:t Dcvitio:s i: li|:tio: i: t|c Dt lxulc
;ou:iso: oi Icsts io: D:co::cltcc scs :c kcsults io: Dciult o::cltio: oi 001,
104
Vasicek One-Factor Model, cf. e.g. TASCHE, D, A traffic lights approach to PD validation.
105
In this context, it is necessary to note that crossing the boundary to uncorrelated defaults , ! 0 is not possible in the approx-
imation shown. For this reason, the procedure will yield excessively high values in the upper default probability limit for very
low default correlations (< 0.005).
I|c ssuutio: oi wc| cciult co::cltio: is l:cc, suiiicic:t i: t|is cxu
lc to :ciutc t|c ssuutio: oi uiscli|:tio: io: t|c uoccl t |ot| t|c -. s
wcll s t|c --- lcvcl D:cc: t|c ssuutio: oi u:co::cltcc cciults, o: t|c
ot|c: |:c, ccvitio:s i: t|c ,cllow ::gc c: i: :ti:g clsscs . to , :c
ccvitio: i: t|c :cc ::gc ;s ccii:cc i: t|c io:cuc:tio:cc t:iiic lig|ts
:oc|, is s|ow: io: t|c ovc:ll sulc
I|c t|lc |clow ;c|:t ., i:cictcs t|c uc: liuits i: t|c o:csiccc tcst t
-. sig:iiic:cc lcvcl io: v:ious cciult co::cltio:s l: t|is co:tcxt, it is
iuo:t:t to :otc t|t wit| |ig|c: cciult co::cltio:s t|c liuits ,iclccc |, t|is
tcst |ccouc lowc: io: :ti:g clss 1 cuc to t|c vc:, low cciult :tc :c t|c
sull :uu|c: oi cscs i: t|t clss
A :uu|c: oi ccitio:l tcst :occcu:cs cxist io: t|c vlictio: oi :ti:g
uoccl cli|:tio:s I|c :oc| :csc:tcc |c:c is cisti:guis|cc |, its :cltivc
siulicit, lcsiccs :l,ticl uoccls,
10o
siuultio: uoccls c: lso |c iulc
uc:tcc, |ut io: cciult co::cltio:s |ctwcc: 001 :c 00. t|c, s|oulc ,iclc
siuil: :csults to t|osc :csc:tcc |c:c I|c |solutc uou:t oi t|c cciult
co::cltio:s t|cusclvcs is lso su||cct to cstiutio:, |owcvc:, t|is will :ot
|c ciscusscc i: iu:t|c: cctil t t|is oi:t
10
lowcvc:, t|c ssuucc co::cl
tio:`s sig:iiic:t i:iluc:cc o: t|c vlictio: :csult s|oulc sc:vc to illust:tc t|t
it is :cccss:, to cctc:ui:c t|is :uctc: s ccu:tcl, s ossi|lc i: o:cc: to
c:|lc uc:i:giul sttcuc:ts :cg:ci:g t|c qulit, oi cli|:tio:
|:t . Dc: Dciult ktc liuits t t|c -. o:iicc:cc lcvcl io: V:ious Dciult o::cltio:s i: t|c lxulc
6.2.3 Back-Testing Transition Matrices
l: gc:c:l, t|c uct|ocs licc io: cciult :o||ilitics c: lso |c uscc to
|c|tcst t|c t::sitio: ut:ix lowcvc:, t|c:c :c two cssc:til ciiic:c:ccs
i: t|is :occcu:c
lc|tcsti:g t::sitio: ut:iccs i:volvcs siuult:cous tcsti:g oi i: l:gc:
:uu|c: oi :o||ilitics I|is iuoscs su|st:till, |ig|c: ct :cqui:cuc:ts
o: t|c sulc uscc io: |c|tcsti:g
I::sitio: :o||ilit, c|:gcs w|ic| |ccouc :cccss:, cu:i:g |c|tcsti:g
uust :ot |:i:g |out i:co:sistc:cics i: t|c t::sitio: ut:ix
I|c :uu|c: oi ct iiclcs i: t|c t::sitio: ut:ix i:c:cscs s|:l, s t|c
:uu|c: oi :ti:g clsscs i:c:cscs ;ci scctio: .+1, lo: cc| coluu: oi t|c
106
Cf. TASCHE, D., A traffic lights approach to PD validation.
107
Cf. DUFFIE, D./SINGLETON, K. J., Simulating correlated defaults and ZHOU, C., Default correlation: an analytical result,
as well as DUFFIE, D./SINGLETON, K. J., Credit Risk, Ch. 10.
t::sitio: ut:ix, t|c ct :cqui:cuc:ts io: |c|tcsti:g t|c ut:ix :c cquiv
lc:t to t|c :cqui:cuc:ts io: |c|tcsti:g cciult :o||ilitics io: ll :ti:g
clsscs
cciiicll,, |c|tcsti:g t|c cciult coluu: i: t|c t::sitio: ut:ix is
cquivlc:t to |c|tcsti:g t|c cciult :o||ilitics ovc: t|c tiuc |o:izo: w|ic|
t|c t::sitio: ut:ix ccsc:i|cs I|c c:t:ics i: t|c cciult coluu: oi t|c t::
sitio: ut:ix s|oulc t|c:cio:c :o lo:gc: |c c|:gcc o:cc t|c :ti:g uoccl |s
|cc: cli|:tcc o: :ccli|:tcc I|is lics to o:c,c: t::sitio: ut:iccs s
wcll s uulti,c: t::sitio: ut:iccs ii t|c uoccl is cli|:tcc io: lo:gc: tiuc
c:iocs
W|c: |c|tcsti:g i:civicul t::sitio: :o||ilitics, it is ossi|lc to t|c
siuliiicc :oc| i: w|ic| t|c t::sitio: ut:ix is civiccc i:to i:civicul clc
uc:t:, cvc:ts l: t|is :oc|, t|c cic|otouous csc i: w|ic| I|c t::sitio:
oi :ti:g clss x lccs to :ti:g clss , ;lvc:t A, o: I|c t::sitio: oi :ti:g
clss x cocs not lcc to :ti:g clss , ;lvc:t l, is tcstcc io: ll i:s oi :ti:g
clsscs I|c io:ccst :o||ilit, oi t::sitio: i:ou x to , j
)oicco:t
t|c: |s to |c
c|ustcc to lvc:t A`s :clizcc i:cquc:c, oi occu::c:cc
I|c :occcu:c ccsc:i|cc is |ig|l, siulistic, s t|c :o||ilitics oi occu:
:c:cc oi ll ossi|lc t::sitio: cvc:ts :c co::cltcc wit| o:c :ot|c: :c s|oulc
t|c:cio:c :ot |c co:sicc:cc sc:tcl, lowcvc:, lc| oi |:owlccgc |out t|c
sizc oi t|c co::cltio: :uctc:s s wcll s t|c :l,ticl coulcxit, oi t|c
:csulti:g cqutio:s :csc:t o|stclcs to t|c :cliztio: oi ut|cuticll, co::cct
solutio:s As i: t|c ssuutio: oi u:co::cltcc cciult cvc:ts, t|c i:civicul
t::sitio: :o||ilitics c: |c su||cctcc to isoltcc |c|tcsti:g io: t|c u:osc
oi i:itil :oxiutio:
lo: cc| i:civicul t::sitio: cvc:t, it is :cccss:, to c|cc| w|ct|c: t|c
t::sitio: ut:ix |s sig:iiic:tl, u:cc:cstiutcc o: ovc:cstiutcc its :o||il
it, oi occu::c:cc I|is c: |c co:c usi:g t|c |i:ouil tcst l: t|c io:uuls
|clow, `
cc:otcs t|c o|sc:vcc i:cquc:c, oi t|c t::sitio: cvc:t ;lvc:t A,,

w|ilc `
1
:cic:s to t|c :uu|c: oi cscs i: w|ic| lvc:t l occu::cc ;ic i: w|ic|
:ti:gs i: t|c suc o:igi:l clss uig:tcc to :, ot|c: :ti:g clss,
;o:csiccc tcst, li
i0
`
1
1
i
_ _
j
)oicco:t
i
1 j
)oicco:t
`
1
i
.
t|c t::sitio: :o||ilit, ws sig:iiic:tl, u:cc:cstiutcc t co:iicc:cc
lcvcl
10
;o:csiccc tcst, li
i0
`
1
1
i
_ _
j
)oicco:t
i
1 j
)oicco:t
`
1
i
< 1 .
t|c t::sitio: :o||ilit, ws sig:iiic:tl, ovc:cstiutcc t co:iicc:cc lcvcl
I|c |i:ouil tcst is csccill, suit|lc io: lictio: cvc: w|c: i:civicul
ut:ix :ows co:ti: o:l, sull :uu|c:s oi cscs li l:gc :uu|c:s oi cscs :c
108
This is equivalent to the statement that the (binomially distributed) probability 1i < `
jj
)oicco:t
; `
`
1
of occur-
rence of a maximum of `
defaults for `
`
1
cases in the original rating class must not be greater than q.
vil|lc, t|c |i:ouil tcst c: |c :clccc wit| tcst usi:g st:c:c :o:ul
cist:i|utio:
10-
|:t o |clow s|ows : cxulc oi |ow t|c |i:ouil tcst woulc |c c:
io:ucc io: o:c :ow i: t::sitio: ut:ix lo: cc| ut:ix iiclc, wc ii:st cl
cultc t|c tcst vluc o: t|c lcit sicc oi t|c i:cqulit, Wc t|c: cou:c t|is tcst
vluc to t|c :ig|t sicc oi t|c i:cqulit, io: t|c -0 :c -. sig:iiic:cc lcvcls
ig:iiic:t ccvitio:s |ctwcc: t|c io:ccst :c :clizcc t::sitio: :tcs :c icc:
tiiicc t t|c -0 lcvcl io: t::sitio:s to clsscs 1|, !, !|, :c !c At t|c -.
sig:iiic:cc lcvcl, o:l, t|c u:cc::u:s oi io:ccst :tcs oi t::sitio: to clsscs 1|
:c !| :c sig:iiic:t
l: t|is co:tcxt, clss 1 is sccil csc |ccusc t|c io:ccst t::sitio: :tc
cquls zc:o i: t|is clss l: t|is csc, t|c tcst vluc uscc i: t|c |i:ouil tcst
lw,s cquls 1, cvc: ii :o t::sitio:s :c o|sc:vcc lowcvc:, t|is is :ot co:
sicc:cc uiscstiutc oi t|c t::sitio: :tc li t::sitio:s :c o|sc:vcc, t|c t::
sitio: :tc is o|viousl, :ot cqul to zc:o :c woulc |vc to |c c|ustcc cco:c
i:gl,
|:t o Dt lxulc io: lc|tcsti:g I::sitio: \t:ix wit| t|c li:ouil Icst
li sig:iiic:t ccvitio:s :c icc:tiiicc |ctwcc: t|c io:ccst :c :clizcc t::
sitio: :tcs, it is :cccss:, to c|ust t|c t::sitio: ut:ix l: t|c siulcst oi
cscs, t|c i:ccu:tc vlucs i: t|c ut:ix :c :clccc wit| :cw vlucs w|ic|
:c cctc:ui:cc cui:icll, lowcvc:, t|is c: lso |:i:g |out i:co:sistc:cics
i: t|c t::sitio: ut:ix w|ic| t|c: u|c it :cccss:, to suoot| t|c ut:ix
I|c:c is :o siulc lgo:it|uic uct|oc w|ic| c:|lcs t|c :llcl c|ust
uc:t oi ll t::sitio: i:cquc:cics to t|c :cqui:cc sig:iiic:cc lcvcls wit| cuc
ttc:tio: to t|c co:sistc:c, :ulcs I|c:cio:c, :ctitio:c:s oitc: usc :gutic
solutio:s i: w|ic| :ts oi i:civicul t::sitio: :o||ilitics :c s|iitcc to
:cig||o:i:g clsscs out oi |cu:istic co:sicc:tio:s i: o:cc: to c|c:c to t|c co:
sistc:c, :ulcs
110
li uulti,c: t::sitio: ut:iccs c: |c clcultcc ci:cctl, i:ou t|c ct sct,
it is :ot |solutcl, :cccss:, to c|c:c to t|c co:sistc:c, :ulcs lowcvc:, w|t
is cssc:til to t|c vlicit, :c :cticl vi|ilit, oi :ti:g uoccl is t|c co:sis
109
Cf. the comments in section 6.2.2 on reviewing the significance of default rates.
110
In mathematical terms, it is not even possible to ensure the existence of a solution in all cases.
tc:c, oi t|c cuuultivc :c co:citio:l cciult :o||ilitics clcultcc i:ou t|c
o:c,c: :c uulti,c: t::sitio: ut:iccs ;ci scctio: .+!,
:cc t::sitio: ut:ix |s |cc: c|ustcc cuc to sig:iiic:t ccvitio:s, it is
:cccss:, to c:su:c t|t t|c ut:ix co:ti:ucs to sc:vc s t|c |sis io: c:ccit :is|
u:gcuc:t lo: cxulc, t|c :cw t::sitio: ut:ix s|oulc lso |c uscc io:
:is||scc :ici:g w|c:cvc: lic|lc
6.2.4 Stability
W|c: :cvicwi:g t|c st|ilit, oi :ti:g uoccls, it is :cccss:, to cxui:c two
sccts sc:tcl,
|:gcs i: t|c cisc:iui:to:, owc: oi :ti:g uoccl givc: io:ccsti:g
|o:izo:s oi v:,i:g lc:gt| :c c|:gcs i: cisc:iui:to:, owc: s lo:s
|ccouc olcc:
|:gcs i: t|c gc:c:l co:citio:s u:cc:l,i:g t|c usc oi t|c uoccl :c t|ci:
ciiccts o: i:civicul uoccl :uctc:s :c o: t|c :csults t|c uoccl gc:c:
tcs
l: gc:c:l, :ti:g uoccls s|oulc |c :o|ust gi:st t|c gi:g oi t|c lo:s
:tcc :c gi:st c|:gcs i: gc:c:l co:citio:s l: ccitio:, :ot|c: cssc:til
c|:ctc:istic oi t|csc uoccls is suiiicic:tl, |ig| lcvcl oi cisc:iui:to:, owc:
io: c:iocs lo:gc: t|: 1! uo:t|s
Changes in Discriminatory Power over Various Forecast Horizons
l: scctio: o!1, wc ccsc:i|cc t|c :occss oi tcsti:g t|c cisc:iui:to:, owc:
oi :ti:g uoccls ovc: tiuc |o:izo: oi 1! uo:t|s lowcvc:, it is lso ossi|lc
to ucsu:c cisc:iui:to:, owc: ovc: lo:gc: c:iocs oi tiuc ii suiiicic:t ct
sct is vil|lc l: t|is co:tcxt, :, ucsu:c oi cisc:iui:to:, owc:, suc| s t|c
Gi:i ociiicic:t ;lowc:stt,, c: |c uscc
W|c: :ti:g uoccls :c otiuizcc io: c:ioc oi 1! uo:t|s, t|ci: cisc:iu
i:to:, owc: ccc:cscs io: lo:gc: tiuc |o:izo:s lc:c it is :cccss:, to c:su:c
t|t t|c cisc:iui:to:, owc: oi :ti:g uoccl o:l, cctc:io:tcs stccil,, t|t
is, wit|out c:oi:g |:utl, to cxccssivcl, low vlucs ou:c :ti:g uoccls
s|oulc lso ccuo:st:tc suiiicic:t cisc:iui:to:, owc: ovc: io:ccsti:g |o:i
zo:s oi t|:cc o: uo:c ,c:s
A:ot|c: scct oi t|c tiuc st|ilit, oi :ti:g uoccls is t|c ccc:csc i: cis
c:iui:to:, owc: s lo:s |ccouc olcc: I|is is csccill, :clcv:t i: t|c csc
oi lictio: sco:cs w|c:c t|c cisc:iui:to:, owc: io: : o|sc:vcc qu:tit,
oi :cw |usi:css cscs ccc:cscs :oticc|l, ovc: c:ioc oi o to !o uo:t|s
itc: : lictio: is su|uittcc I|is is cuc to t|c ict t|t t|c ct uscc i:
lictio: sco:i:g |ccouc lcss sig:iiic:t ovc: tiuc I|c:cio:c, :ctitio:c:s
i:cquc:tl, coulcuc:t lictio: sco:i:g uoccls wit| |c|vio: sco:i:g uoc
cls I|c lttc: uoccls cvlutc uo:c :ccc:t i:io:utio: i:ou t|c ccvclouc:t
oi t|c c:ccit t::sctio: :c t|c:cio:c :ovicc |cttc: i:cicto: oi c:ccitwo:
t|i:css t|: lictio: sco:i:g uoccls lo:c lowcvc:, |c|vio: sco:i:g is :ot
ossi|lc u:til c:ccit icilit, |s :cc|cc cc:ti: lcvcl oi utu:it,, t|t is, o:cc
|c|vio::cltcc ct :c ctull, vil|lc
Changes in the General Conditions for Model Use
I|c sscssuc:t oi c|:gcs i: t|c gc:c:l co:citio:s u:cc: w|ic| uoccl is
uscc |s st:o:g qulittivc clcuc:ts : t|c o:c |:c, it is :cccss:, to :cvicw
w|ct|c: ccvclouc:ts i: t|c cco:ouic, oliticl, o: lcgl c:vi:o:uc:t will
|vc : i:iluc:cc o: t|c :ti:g uoccl o: i:civicul uoccl :uctc:s :c c:i
tc:i : t|c ot|c: |:c, i:tc::l icto:s t t|c |:| suc| s c|:gcs i: |usi:css
st:tcgics, t|c cx:sio: oi ctivitics i: cc:ti: u:|ct scguc:ts, o: c|:gcs i:
o:g:iztio:l st:uctu:cs u, lso iicct t|c c:io:u:cc oi :ti:g uoccl su|
st:till,
|:gcs i: t|c cco:ouic c:vi:o:uc:t i:clucc t|c |usi:css c,clc i: :tic
ul:, w|ic| c: cusc u|o: iluctutio:s i: t|c :uctc: lD cu:i:g c:iocs oi
:ccovc:, :c cccli:c lowcvc:, icto:s suc| s tcc|:icl :og:css o: oliticl
:c lcgl ccvclouc:ts c: lso i:iluc:cc t|c ciicctivc:css oi :ti:g uoccls
l: :ticul:, cou:t:, :c :cgio:l :ti:gs ccc:c |cvil, o: c|:gcs i: t|c
oliticl c:vi:o:uc:t lowcvc:, suc| scc::ios s|oulc l:cc, |c i:tcg:tcc
i:to :ti:g uoccl, ot|c:wisc o:c woulc |vc to qucstio: t|c suit|ilit, oi
t|c uoccl itscli
lxulcs i: t|c lcgl c:vi:o:uc:t i:clucc c|:gcs i: couuc:cil lw o:
ccou:ti:g st:c:cs w|ic| u, |vc ositivc o: :cgtivc i:iluc:cc o: t|c
ciicctivc:css :c sig:iiic:cc oi cc:ti: ii::cil i:cicto:s |:gcs i: lcgisl
tio: w|ic| :c :clcv:t i: t|is co:tcxt lso i:clucc :cvisio:s oi t|c ui:iuuu
su|sistc:cc lcvcl ;ic t|c sl:, uou:t w|ic| c::ot |c ttc|cc, o: c|:gcs
i: |:|:utc, :occcu:cs l: :ticul:, t|csc c|:gcs c: cusc s|iits i: t|c
:is| :uctc: lGD
Qu:tii,i:g t|c ciiccts oi c|:gcs i: gc:c:l co:citio:s o: t|c iu:ctio:lit,
oi :ti:g uoccls :cqui:cs : i:cct| :l,sis oi t|c uoccl :uctc:s :c
s|oulc t|c:cio:c ccou:, t|c o:goi:g ccvclouc:t oi t|c uoccl kti:g
uoccls |vc to u:cc:go iu:t|c: ccvclouc:t w|c:cvc: t|ci: c:io:u:cc
ccc:cscs cuc to c|:gcs i: gc:c:l co:citio:s
: t|c ot|c: |:c, t|c |:| u, lso cccicc to ccvclo :cw :ti:g uoccl
ii cxc:ts |clicvc t|t otc:til o: l::cc c|:gc i: gc:c:l co:citio:s woulc
lcc to su|st:til loss i: t|c c:io:u:cc oi t|c cu::c:t uoccl
6.3 Benchmarking
l: t|c qu:tittivc vlictio: oi :ti:g uoccls, it is :cccss:, to cisti:guis|
|ctwcc: |c|tcsti:g :c |c:c|u:|i:g
111
lc|tcsti:g :cic:s to vlictio:
o: t|c |sis oi |:|`s i:|ousc ct l: :ticul:, t|is tc:u ccsc:i|cs t|c cou
:iso: oi io:ccst :c :clizcc cciult :tcs i: t|c |:|`s c:ccit o:tiolio
l: co:t:st, |c:c|u:|i:g :cic:s to t|c lictio: oi :ti:g uoccl to
:cic:c:cc ct sct ;|c:c|u:| ct sct, lc:c|u:|i:g scciiicll, llows qu:
tittivc sttisticl :ti:g uoccls to |c cou:cc usi:g u:iio:u ct sct lt c:
|c :ovc: t|t t|c i:cicto:s uscc i: qu:tittivc vlictio: i: :ticul: cis
c:iui:to:, owc: ucsu:cs, |ut lso cli|:tio: ucsu:cs ccc:c t lcst i:
:t o: t|c sulc cxui:cc
11!
I|c:cio:c, |c:c|u:|i:g :csults :c :cic:|lc
111
112
HAMERLE/RAUHMEIER/RO
SCH, Uses and misuses of measures for credit rating accuracy.

to i:tc::l |c|tcsti:g :csults i: t|c cou:tivc cvlutio: oi ciiic:c:t :ti:g
uoccls
l: tc:us oi uct|oc :c co:tc:t, |c|tcsti:g :c |c:c|u:|i:g i:volvc t|c
suc :occcu:cs lowcvc:, t|c two :occcu:cs` :csults :c i:tc::ctcc ciiic:
c:tl, i: tc:us oi scoc :c o:ic:ttio:
Back-Testing for Discriminatory Power
loo: :csults i:ou cisc:iui:to:, owc: tcsts i: t|c |:|`s ow: ct sct :iu:
il, i:cictc wc|:csscs i: t|c :ti:g uoccl :c s|oulc :out t|c ccvclouc:t
oi :cw o: :cviscc uoccl lowcvc:, sou:c cisc:iui:to:, owc: :csults i:ou
|c|tcsti:g lo:c co :ot :ovicc :cli|lc i:cictio: oi :ti:g uoccl`s gooc
:css oi iit cou:cc to ot|c: uoccls
Testing Discriminatory Power by Benchmarking
loo: :csults i:ou cisc:iui:to:, owc: tcsts usi:g cxtc::l :cic:c:cc ct u,
i:cictc st:uctu:l ciiic:c:ccs |ctwcc: t|c ct scts uscc io: :ti:g ccvclo
uc:t :c |c:c|u:|i:g I|is is csccill, t:uc w|c: t|c cisc:iui:to:, owc:
oi t|c uoccl is cou:tivcl, |ig| i: |c|tcsti:g lowcvc:, gooc :csults i:
|c|tcsti:g cisc:iui:to:, owc: cou:cc to ot|c: :ti:g uoccls s|oulc
:ot |c co:sicc:cc t|c o:l, c:itc:io: io: :ti:g uoccl`s gooc:css oi iit I|c
:csults s|oulc lso |c cou:cc to t|c cisc:iui:to:, owc: cc:ivcc i:ou
t|c |:|`s i:tc::l |c|tcsts
Testing Calibration by Back-Testing
l: gc:c:l, t|c cli|:tio: oi :ti:g s,stcu s|oulc lw,s |c :cvicwcc usi:g t|c
|:|`s i:tc::l ct :c c|ustcc cco:ci:g to t|c :csults :l, i: t|is w, is it
ossi|lc to c:su:c t|t t|c :ti:g uoccl`s :is| cstiutcs ccu:tcl, :cilcct t|c
st:uctu:c oi t|c o:tiolio :l,zcc
Testing Calibration by Benchmarking
I|c cli|:tio: oi :ti:g uoccl s|oulc :ot |c tcstcc usi:g |c:c|u:| ct
lo:c, s t|c st:uctu:c oi :cic:c:cc ct woulc |vc to :cciscl, utc| t|c scg
uc:t i: w|ic| t|c :ti:g uoccl is uscc :l, t|c: coulc o:c cxcct :cli|lc
:csults i:ou cli|:tio:s to |c:c|u:| ct w|c: l,i:g t|c uoccl to t|c
|:|`s i:|ousc ct I|c:cio:c, it is o:l, cvis|lc to cli|:tc :ti:g uoccl
to |c:c|u:| o: :cic:c:cc ct i: cscs w|c:c t|c qulit, o: qu:tit, oi t|c
|:|`s i:tc::l ct is i:suiiicic:t to c:|lc cli|:tio: wit| : ccct|lc lcvcl
oi sttisticl :ccisio: l: :ticul:, t|is u, |c t|c csc i: scguc:ts wit| low
:uu|c:s oi cciults o: i: |ig|l, sccilizcc scguc:ts
Quality Requirements for Benchmark Data
A :uu|c: oi :cqui:cuc:ts l, to t|c ct sct uscc i: |c:c|u:|i:g
Data quality:
I|c ct qulit, oi t|c |c:c|u:| sulc |s to t lcst iuliill t|c :cqui:c
uc:ts w|ic| l, to t|c ccvclouc:t :c vlictio: oi :ti:g uoccls
wit|i: t|c |:|
Consistency of input data fields:
lt is iuo:t:t to c:su:c t|t t|c co:tc:t oi ct iiclcs i: t|c |c:c|u:|
sulc utc|cs t|t oi t|c i:ut ct iiclcs :cqui:cc i: t|c :ti:g uoccl
I|c:cio:c, it is |solutcl, :cccss:, t|t ii::cil ct suc| s ::ul ii::
cil sttcuc:ts :c |scc o: u:iio:u lcgl :cgultio:s l: t|c csc oi qul
ittivc ct, i:civicul ct iiclc ccii:itio:s lso |vc to utc|, |owcvc:,
|ig|l, scciiic wo:ci:gs :c oitc: c|osc: i: t|c ccvclouc:t oi qulittivc
uoculcs I|is u|cs |c:c|u:| cou:iso:s oi v:ious :ti:g uoccls
cxcctio:ll, ciiiicult lt is ossi|lc to u ct w|ic| :c ccii:cc o: ctc
go:izcc ciiic:c:tl, i:to couuo: ct uoccl, |ut t|is :occss :c:csc:ts
:ot|c: otc:til sou:cc oi c::o:s I|is u, ccsc:vc sccil ttc:tio: i:
t|c i:tc::cttio: oi |c:c|u:|i:g :csults
Consistency of target values:
l: ccitio: to t|c co:sistc:c, oi i:ut ct iiclcs, t|c ccii:itio: oi t:gct
vlucs i: t|c uoccls cxui:cc uust |c co:sistc:t wit| t|c ct i: t|c
|c:c|u:| sulc l: |c:c|u:|i:g io: :ti:g uoccls, t|is uc:s t|t
ll uoccls cxui:cc s wcll s t|c u:cc:l,i:g sulc |vc to usc t|c suc
ccii:itio: oi cciult li t|c |c:c|u:| sulc uscs :::owc: ;|:occ:,
ccii:itio: oi c:ccit cciult t|: t|c :ti:g uoccl, t|is will i:c:csc
;ccc:csc, t|c uoccl`s cisc:iui:to:, owc: :c siuult:cousl, lcc to
ovc:cstiutcs ;u:cc:cstiutcs, oi cciult :tcs
Structural consistency:
I|c st:uctu:c oi t|c ct sct uscc io: |c:c|u:|i:g |s to ccict t|c :cscc
tivc :ti:g uoccls` :c oi lictio: wit| suiiicic:t ccu:c, lo: cxulc,
w|c: tcsti:g co:o:tc custouc: :ti:gs it is :cccss:, to c:su:c t|t t|c
cou:, sizc clsscs i: t|c sulc utc| t|c :ti:g uoccls` :c oi li
ctio: I|c sulc u, |vc to |c clc:scc oi u:suit|lc cscs o: otiuizcc
io: t|c t:gct :c oi lictio: |, cci:g suit|lc cscs t|c: sccts
w|ic| u, ccsc:vc ttc:tio: i: t|c sscssuc:t oi |c:c|u:| sulc`s :c
:csc:ttivit, i:clucc t|c :cgio:l cist:i|utio: oi cscs, t|c st:uctu:c oi t|c
i:cust:,, o: t|c lcgl io:u oi |usi:css o:g:iztio:s l: t|is :cscct, t|c
:cqui:cuc:ts iuoscc o: t|c |c:c|u:| sulc :c l:gcl, t|c suc s
t|c :c:csc:ttivit, :cqui:cuc:ts io: t|c ct sct uscc i: :ti:g uoccl
ccvclouc:t
6.4 Stress Tests
6.4.1 Definition and Necessity of Stress Tests
l: gc:c:l, st:css tcsts c: |c ccsc:i|cc s i:st:uuc:ts io: cstiuti:g t|c otc:
til ciiccts : cxt:o:ci::, |ut lusi|lc cvc:t u, |vc o: : i:stitutio:
I|c tc:u cxt:o:ci::, i: t|is ccii:itio: iulics t|t st:css tcsts cvlutc
t|c co:scquc:ccs oi cvc:ts w|ic| |vc low :o||ilit, oi occu::c:cc low
cvc:, c:isis cvc:ts uust :ot |c so :cuotc i:ou :cticc t|t t|c, |ccouc
iulusi|lc t|c:wisc, t|c st:css tcst woulc ,iclc u::clistic :csults i:ou
w|ic| :o uc:i:giul ucsu:cs coulc |c cc:ivcc
I|c scciiic :ccc io: st:css tcsts i: lc:ci:g oc:tio:s c: |c illust:tcc |,
t|c iollowi:g cxc:ic:ccs wit| |isto:icl c:isis cvc:ts
Changes in correlations
:c oi t|c :iu:, o||cctivcs oi c:ccit o:tiolio u:gcuc:t is to civc:sii, t|c
o:tiolio, t|c:c|, u|i:g it ossi|lc ui:iuizc :is|s u:cc: :o:ul cco:ouic
co:citio:s lowcvc:, st cxc:ic:cc |s s|ow: t|t gc:c:ll, lic|lc co:
:cltio:s :c :o lo:gc: vlic u:cc: c:isis co:citio:s, uc:i:g t|t cvc: wcll
civc:siiicc o:tiolio u, succc:l, cx|i|it |ig| co:cc:t:tio: :is|s I|c c:ccit
o:tiolio`s usul :is| ucsu:cuc:t ucc|:isus :c t|c:cio:c :ot lw,s suiii
cic:t :c |vc to |c coulcuc:tcc wit| st:css tcsts
Rapid Propagation of Crisis Situations
l: :ccc:t ,c:s, t|c ciiicic:c, oi u:|cts |s i:c:cscc su|st:till, cuc to t|c
i:t:ocuctio: oi uocc:: couuu:ictio: tcc|:ologics :c t|c glo|liztio: oi
ii::cil u:|cts lowcvc:, t|csc ccvclouc:ts |vc lso sc:vcc to ccclc:tc
t|c :ogtio: oi c:isis situtio:s o: t|c ii::cil u:|cts, w|ic| uc:s t|t
|:|s u, :o lo:gc: |c c|lc oi :cso:ci:g to suc| situtio:s i: tiucl,
u::c: t:css tcsts c:w ttc:tio: to :is|s :isi:g u:cc: cxt:o:ci::, co:ci
tio:s :c c: |c uscc to ccii:c cou:tc:ucsu:cs wcll i: cv:cc I|csc ucs
u:cs c: t|c: |c t|c: quic|l, ii c:isis situtio: s|oulc ctull, :isc
I|c:cio:c, st:css tcsts s|oulc lw,s |c :cg:ccc s :cccss:, coulcuc:t
to |:|`s ot|c: :is| u:gcuc:t tools ;cg :ti:g s,stcus, c:ccit o:tiolio
uoccls, W|c:cs st:css tcsts c: |cl |:| cstiutc its :is| i: cc:ti: c:isis
situtio:s, t|c ot|c: :is| u:gcuc:t tools suo:t :is||scc c:ccit o:tiolio
u:gcuc:t u:cc: :o:ul |usi:css co:citio:s l: ccitio:, lscl ll :cqui:cs
lkl |:|s to c:io:u st:css tcsts io: t|c u:osc oi sscssi:g citl cc
quc,
11!
I|c :occcu:c ccsc:i|cc |c:c, |owcvc:, gocs wcll |c,o:c t|c o||cc
tivcs :c :cqui:cuc:ts oi lscl ll
cctio: o+! ccsc:i|cs t|c ui: c|:ctc:istics st:css tcst s|oulc |vc,
itc: w|ic| wc :csc:t gc:c:l :occcu:c io: ccvcloi:g st:css tcsts i: scctio:
o+!
6.4.2 Essential Factors in Stress Tests
I|c cssc:til icto:s i: t|c ccvclouc:t :c lictio: oi st:css tcsts :c s
iollows
o:sicc:tio: oi o:tiolio couositio: :c gc:c:l co:citio:s
oulctc:css oi :is| icto:s i:cluccc i: t|c uoccl
lxt:o:ci::, c|:gcs i: :is| icto:s
Accct:cc
kco:ti:g
Dcii:itio: oi cou:tc:ucsu:cs
kcgul: ucti:g
Docuuc:ttio: :c :ovl
Consideration of Portfolio Composition and General Conditions
As st:css tcsts sc:vc to :cvcl o:tiolioscciiic wc|:csscs, it is iuo:t:t to
|cc t|c couositio: oi t|c i:stitutio:`s i:civicul c:ccit o:tiolio i: ui:c
w|c: ccvcloi:g st:css tcsts
113
l: o:cc: to c:su:c lusi|ilit,, s u:, i:tc::l :c cxtc::l cxc:ts s os
si|lc i:ou v:ious :oicssio:l :cs s|oulc :ticitc i: t|c ccvclouc:t oi
st:css tcsts
Completeness of Risk Factors Included in the Model
lst cxc:ic:cc |s s|ow: t|t w|c: c:isis situtio:s :isc, uultilc :is| icto:s
tc:c to s|ow clc:l, u:ivo:|lc c|:gcs t t|c suc tiuc ou:c|c:sivc :c
:clistic c:isis scc::ios will t|us i:clucc siuult:cous c|:gcs i: ll cssc:til
:is| icto:s w|c:cvc: ossi|lc t:css tcsts w|ic| co:sicc: t|c ciiccts oi c|:gc
i: o:l, o:c :is| icto: ;o:cicto: st:css tcsts, s|oulc o:l, |c c:io:ucc s
coulcuc:t io: t|c :l,sis oi i:civicul sccts ;lo: : cxulc oi |ow :is|
icto:s c: |c ctcgo:izcc, lcsc scc c|:t ,
Extraordinary Changes in Risk Factors
t:css tcsts s|oulc o:l, ucsu:c t|c ciiccts oi l:gcsclc :co: cxt:o:ci::,
c|:gcs i: :is| icto:s I|c |:|`s cvc:,c, :is| u:gcuc:t tools c: ;:c
s|oulc, ctu:c t|c ciiccts oi :o:ul c|:gcs
Acceptance
l: o:cc: to c:cou:gc u:gcuc:t to c|:owlccgc s sc:si|lc tool io:
iu:ovi:g t|c |:|`s :is| situtio: s wcll, st:css tcsts :iu:il, |vc to |c lu
si|lc :c cou:c|c:si|lc I|c:cio:c, u:gcuc:t s|oulc |c i:io:ucc s c:l,
s ossi|lc |out st:css tcsts :c ii ossi|lc |c ctivcl, i:volvcc i: ccvclo
i:g t|csc tcsts i: o:cc: to c:su:c t|c :cccss:, ccct:cc
Reporting
:cc t|c st:css tcsts |vc |cc: c::icc out, t|ci: uost :clcv:t :csults s|oulc |c
:co:tcc to t|c u:gcuc:t I|is will :ovicc t|cu wit| : ovc:vicw oi t|c
sccil :is|s i:volvcc i: c:ccit t::sctio:s I|is i:io:utio: s|oulc |c su|uit
tcc s :t oi :cgul: :co:ti:g :occcu:cs
Definition of Countermeasures
\c:cl, :l,zi:g |:|`s :is| :oiilc i: c:isis situtio:s is :ot suiiicic:t l: cci
tio: to st:csstcsti:g, it is lso iuo:t:t to ccvclo otc:til cou:tc:ucsu:cs
;cg t|c :cvc:sl o: :cst:uctu:i:g oi ositio:s, io: c:isis scc::ios lo: t|is u:
osc, it is :cccss:, to ccsig: suiiicic:tl, ciiic:c:titcc st:css tcsts i: o:cc: to
c:|lc t:gctcc cusl :l,scs io: otc:til losscs i: c:isis situtio:s
Regular Updating
As t|c o:tiolio`s couositio: s wcll s oliticl :c cco:ouic co:citio:s c:
c|:gc t :, tiuc, st:css tcsts |vc to |c ctcc to t|c cu::c:t situtio: o: :
o:goi:g |sis i: o:cc: to icc:tii, :c cvlutc c|:gcs i: t|c |:|`s :is| :oiilc
i: tiucl, u::c:
Documentation and Approval
I|c o||cctivcs, :occcu:cs, :cso:si|ilitics, :c ll ot|c: sccts ssocitcc
wit| st:css tcsts |vc to |c cocuuc:tcc :c su|uittcc io: u:gcuc:t :o
vl
6.4.3 Developing Stress Tests
I|is scctio: :csc:ts o:c ossi|lc :occcu:c io: ccvcloi:g :c c:io:ui:g
st:css tcsts I|c :occcu:c :csc:tcc |c:c c: |c civiccc i:to six stgcs
|:t Dcvcloi:g :c lc:io:ui:g t:css Icsts
Step 1: Ensuring Data Quality
:c |sic :c:cquisitc io: succcssiul st:csstcsti:g is |ig|qulit, ct sct
:l, w|c: t|c ct uscc :c ccu:tc :c u to ctc c: st:css tcsts ,iclc suit
|lc :csults i:ou w|ic| ciicctivc cou:tc:ucsu:cs c: |c cc:ivcc
lo: cxulc, it is c:ucil to c:su:c t|t :ti:gs :c lw,s u to ctc :c
vlic li t|is is :ot t|c csc, t|c |o::owc:s` c:ccitwo:t|i:css ;:c t|us lso
t|c co::cso:ci:g lD, u, c|:gc su|st:till, wit|out t|c |:owlccgc oi
t|c c:ccit i:stitutio: I|c st:css tcst woulc t|c: |c |scc o: : outctcc :is|
situtio:, :c woulc t|us |c u:|lc to gc:c:tc uc:i:giul io:ccsts u:cc: c:i
sis co:citio:s
t|c: iuo:t:t c:ccit o:tiolio ct i:clucc t|c outst:ci:g voluuc oi
cc| c:ccit icilit,, t|c i:tc:cst :tc, s wcll s :, vil|lc colltc:l
Dsi:g i:ccu:tc o: ctcc colltc:l vlucs, io: cxulc, c: lso cisto:t t|c
:is| situtio: I|is is :cciscl, t|c csc w|c: cxccssivcl, |ig| colltc:l vlucs
;w|ic| c::ot |c tti:cc i: t|c csc oi :cliztio:, :c c:tc:cc
luo:t:t u:|ct ct w|ic| u, siuult:cousl, :c:csc:t :is| icto:s
i:clucc i:tc:cst :tcs, cxc|:gc :tcs :c stoc| i:ciccs I|is i:io:utio: is
:cqui:cc i: :ticul: to vlutc t:ci:g |oo| ositio:s w|ic| i:volvc c:ccit
:is|
li t|c |:| uscs c:ccit o:tiolio uoccls, t|c ct qulit, u:cc:l,i:g t|c
cciult :tc voltilit, :c co::cltio:s |ctwcc: i:civicul c:ccit icilitics o: |o:
:owc:s is csccill, iuo:t:t
Step 2: Analyzing the Credit Portfolio and Other General Conditions
:c cssc:til c|:ctc:istic oi :cli|lc st:css tcst is t|c i:clusio: oi : i:sti
tutio:`s i:civicul c:ccit o:tiolio couositio: s wcll s t|c :cvili:g oliticl
:c cco:ouic co:citio:s ;scc scctio: o+!,
lo: t|is :cso:, it is ii:st :cccss:, to couilc list oi t|c c:ccit :ocucts
cu::c:tl, i: usc :c to sulcuc:t t|c list wit| otc:til :cw c:ccit :ocucts s
wcll I|c cccisivc :is| icto:s s|oulc |c icc:tiiicc io: cc| i:civicul c:ccit
:ocuct
lt is t|c: :cccss:, to so:t t|c icto:s |, :clcv:cc, :c to g:ou t|osc :is|
icto:s w|ic| i:iluc:cc cc| ot|c: st:o:gl, u:cc: :o:ul co:citio:s o: i: c:isis
situtio:s
I|csc g:ous u|c it ossi|lc to st:css :ot o:l, i:civicul :is| icto:s |ut
ll :clcv:t icto:s siuult:cousl, i: t|c ccvclouc:t oi st:css tcsts
l: t|c :cxt stc, it is :cccss:, to :l,zc t|c :cvili:g socil, cco:ouic,
:c oliticl co:citio:s :c to iiltc: s u:, otc:til c:isis situtio:s s ossi
|lc out oi t|is :l,sis lo: t|is u:osc, it is iuo:t:t to usc i:|ousc s wcll
s cxtc::l cxc:tisc l: :ticul:, it is c:ucil to i:clucc t|c |:|`s ow:
cxc:ts i:ou v:ious :cs :c |ic::c|icl lcvcls i: o:cc: to c:su:c t|t t|c
st:css tcsts tti: t|c :cccss:, lcvcl ccct:cc I|is will icilittc :, ltc:
iulcuc:ttio: oi otc:till, c:stic cou:tc:ucsu:cs :csulti:g i:ou st:css
tcsts
lossi|lc :is| icto: t,cs w|ic| u, :isc i:ou t|c :l,scs uc:tio:cc
|ovc :c :csc:tcc i: c|:t I|is :csc:ttio: is uc:t to sc:vc s guicc
io: |:|`s i:civicul ccsig: oi st:css tcsts :c c: |c cx:ccc s :cccss:,
|:t kis| lcto: I,cs
Counterparty-based and credit facility-based risk factors I|csc scc::ios c:
|c :clizcc wit| :cltivc csc |, cstiuti:g c:ccit losscs itc: uoccli:g c|:gc
i: lD :co: lGDlAD I|c uct|ocs oi uoccli:g st:css tcsts i:clucc t|c iol
lowi:g cxulcs
Dow:g:ci:g ll |o::owc:s |, o:c :ti:g clss
l:c:csi:g cciult :o||ilitics |, cc:ti: c:cc:tgc
l:c:csi:g lGD |, cc:ti: c:cc:tgc
l:c:csi:g lAD |, cc:ti: c:cc:tgc io: v:i|lc c:ccit :ocucts ;|usti
iictio: custouc:s :c li|cl, to utilizc c:ccit li:cs uo:c |cvil, i: c:isis sit
utio:s, io: cxulc,
Assuutio: oi :cgtivc c:ccit s:cc ccvclouc:ts ;cg :llcl s|iits i:
tc:u st:uctu:cs oi i:tc:cst :tcs, io: |o:cs
\occli:g oi i:ut icto:s ;cg |l:cc s|cct i:cicto:s,
I|c :oc|cs listcc |ovc c: lso |c cou|i:cc wit| o:c :ot|c: s
ccsi:cc i: o:cc: to gc:c:tc st:css tcsts oi v:,i:g scvc:it,
Wit| :cg:c to general conditions, cxulcs uig|t i:clucc st:css tcsts io:
scciiic i:cust:ics o: :cgio:s uc| tcsts uig|t i:volvc t|c iollowi:g
Dow:g:ci:g ll |o::owc:s i: o:c o: uo:c c:isisiicctcc i:cust:ics
Dow:g:ci:g ll |o::owc:s i: o:c o: uo:c c:isisiicctcc :cgio:s
\c:occo:ouic :is| icto:s i:clucc i:tc:cst :tcs, cxc|:gc :tcs, ctc
I|csc icto:s s|oulc u:cc:go st:csstcsti:g csccill, w|c: t|c |:| uscs t|cu
s t|c |sis io: c:ccit :is| uoccls w|ic| cstiutc lD o: c:ccit losscs li t|c |:|
uscs uoccls, t|csc st:css tcsts :c to |c c:io:ucc |, c|usti:g t|c :uctc:s
:c t|c: :cclculti:g c:ccit losscs
lxulcs i:clucc
D:ivo:|lc c|:gcs ;i:c:cscsccc:cscs, ccc:ci:g o: o:tiolio couo
sitio:, i: t|c u:cc:l,i:g i:tc:cst :tc |, cc:ti: :uu|c: oi |sis oi:ts
D:ivo:|lc c|:gcs ;i:c:cscsccc:cscs, ccc:ci:g o: o:tiolio couo
sitio:, i: c:ucil cxc|:gc :tcs |, cc:ti: c:cc:tgc
lt is :ticul:l, iuo:t:t to cxui:c oliticl :is| icto:s w|c: sig:iiic:t
:ts oi t|c c:ccit o:tiolio co:sist oi |o::owc:s i:ou oliticll, u:st|lc cou:
t:ics Duc to t|c coulcx i:tc::cltio:s|is i:volvcc, |owcvc:, ccvcloi:g
lusi|lc st:css tcsts io: oliticl :is| icto:s i:volvcs i: uo:c ciio:t t|:
ccsig:i:g tcsts io: uc:occo:ouic :is| icto:s, io: cxulc lt is t|c:cio:c
cvis|lc to cll i: sccilists to ccvclo st:css tcsts io: oliticl :is| icto:s
i: o:cc: to sscss t|c :clcv:t ciiccts o: ii::cil :c uc:occo:ouic co:ci
tio:s
li t|c |:| uscs risk models ;suc| s c:ccit o:tiolio uoccls o: c:ccit :ici:g
uoccls,, it is :cccss:, to c:io:u st:css tcsts w|ic| s|ow w|ct|c: t|c ssuu
tio:s u:cc:l,i:g t|c :is| uoccls will lso |c iuliillcc i: c:isis situtio:s :l,
t|c: will t|c uoccls |c |lc to :ovicc t|c :o:itc guic:cc i: c:isis situ
tio:s s wcll
t|c: :is| uoccl:cltcc st:css tcsts uig|t iocus o: :is| :uctc:s suc| s
co::cltio:s, t::sitio: ut:iccs, :c cciult :tc voltilitics l: :ticul:, it
c: sc:si|lc to usc ciiic:c:t co::cltio: :uctc:s i: st:css tcsts |ccusc
st cxc:ic:cc |s s|ow: t|t t|c |isto:icl vc:gc co::cltio:s ssuucc
u:cc: gc:c:l co:citio:s :o lo:gc: l, i: c:isis situtio:s
kcsc:c| |s lso :ovc: t|t uc:occo:ouic co:citio:s ;cco:ouic g:owt|
o: :cccssio:, |vc sig:iiic:t iuct o: t::sitio: :o||ilitics
11+
lo: t|is :c
so:, it u|cs sc:sc to ccvclo t::sitio: ut:iccs u:cc: t|c ssuutio: oi cc:
ti: c:isis situtio:s :c to :ccvlutc t|c c:ccit o:tiolio usi:g t|csc t::sitio:
ut:iccs
lxulcs oi suc| c:isis scc::ios i:clucc t|c iollowi:g
l:c:csi:g t|c co::cltio:s |ctwcc: i:civicul |o::owc:s |, cc:ti: c:
cc:tgc
l:c:csi:g t|c co::cltio:s |ctwcc: i:civicul |o::owc:s i: c:isisiicctcc
i:cust:ics |, cc:ti: c:cc:tgc
l:c:csi:g t|c :o||ilit, oi t::sitio: to lowc: :ti:g clsscs :c siuult
:cousl, ccc:csi:g t|c :o||ilit, oi t::sitio: to |ig|c: :ti:g clsscs
l:c:csi:g t|c voltilit, oi cciult :tcs |, cc:ti: c:cc:tgc
I|c size of changes i: :is| icto:s io: st:css tcsts c: cit|c: |c ccii:cc |,
su||cctivc cxc:t |ucguc:t o: cc:ivcc i:ou st cxc:ic:cc i: c:isis situtio:s
W|c: st cxc:ic:cc is uscc, t|c o|sc:vtio: c:ioc s|oulc covc: t lcst
o:c |usi:css c,clc :c s u:, c:isis cvc:ts s ossi|lc :cc t|c tiuc i:tc:vl
|s |cc: ccii:cc, it is ossi|lc to ccii:c t|c uou:t oi t|c c|:gc i: t|c :is|
icto: s t|c ciiic:c:cc |ctwcc: st:ti:g :c c:ci:g vlucs o: s t|c uxiuuu
c|:gc wit|i: t|c o|sc:vtio: c:ioc, io: cxulc
Step 3: Architecture of Stress Tests
: t|c |sis oi t|c :cvious :l,scs, it is ossi|lc to usc o:c oi t|c st:uctu:cs
s|ow: i: c|:t - io: t|c st:css tcst
|:t - ,stcutic vc:vicw oi t:css Icsts
One-factor stress tests ucsu:c t|c ciicct oi c:stic c|:gcs i: i:civicul :is|
icto:s o: cc:ti: c:ccit ositio:s :c t|c c:ccit o:tiolio W|c: ctul c:isis
cvc:ts occu:, |owcvc:, uultilc :is| icto:s :c lw,s iicctcc t t|c suc
tiuc I|c:cio:c, cuc to t|ci: lc| oi lusi|ilit, o:cicto: st:css tcsts :c o:l,
suit|lc to liuitcc cxtc:t lowcvc:, t|csc st:css tcsts c: |cl t|c |:| icc:
114
See BANGIA, ANIL/DIEBOLD, FRANCIS X./ SCHUERMANN, TIL, Ratings Migration and the Business Cycle.
tii, cccisivc icto:s i:iluc:ci:g i:civicul ositio:s :c to clucictc i:tc::cl
tio:s|is uo:c ciicctivcl,
Multi-factor stress tests ttcut to siuultc :clit, uo:c closcl, :c cxui:c
t|c ciiccts oi siuult:cous c|:gcs i: uultilc :is| icto:s I|is t,c oi st:css
tcst is lso :cic::cc to s scc::io st:css tcst
cc::ios c: |c ccsig:cc cit|c: tocow: o: |ottouu l: t|c tocow:
:oc|, c:isis cvc:t is ssuucc i: o:cc: to icc:tii, its i:iluc:cc o: :is| ic
to:s I|c |ottouu :oc| i:volvcs ci:cct c|:gcs i: t|c :is| icto:s wit|
out ssuui:g scciiic c:isis cvc:t
lowcvc:, w|t is uo:c cccisivc i: t|c ccvclouc:t oi uultiicto: st:css
tcst is w|ct|c: t|c :is| icto:s :c t|c ccou:,i:g ssuucc c|:gcs :c
ccvclocc o: t|c |sis oi st cxc:ic:cc ;|isto:icl c:isis scc::ios, o: |,o
t|cticl cvc:ts ;|,ot|cticl c:isis scc::ios,
Historical crisis scenarios oiic: t|c cv:tgc oi c:|li:g t|c usc oi |isto:icl
c|:gcs i: :is| icto:s, t|us c:su:i:g t|t ll :clcv:t :is| icto:s :c t|c: i:to
ccou:t :c t|t t|c ssuucc c|:gcs :c lusi|lc o: t|c |sis oi st cxc:i
c:cc
l: t|is co:tcxt, t|c :iu:, c|llc:gc is to sclcct scc::ios w|ic| :c suitcc
to t|c c:ccit o:tiolio :c lso lic|lc to t|c otc:til c|:gcs i: gc:c:l
co:citio:s Dltiutcl,, :o o:c c:isis will cvc: |c icc:ticl to :ot|c:, w|ic|
uc:s t|t cxt:cuc cutio: is :cqui:cc i: t|c ccvclouc:t oi uultiicto:
st:css tcsts |scc o: st cxc:ic:cc
Dsi:g hypothetical crisis situations is csccill, :o:itc w|c: t|c vil|lc
|isto:icl scc::ios co :ot iit t|c c|:ctc:istics oi t|c c:ccit o:tiolio, o: w|c:
it is ccsi:|lc to cxui:c t|c ciiccts oi :cw cou|i:tio:s oi :is| icto:s :c
t|ci: c|:gcs
l: t|c co:st:uctio: oi |,ot|cticl c:isis scc::ios, it is csccill, iuo:t:t
to c:su:c t|t :o :clcv:t :is| icto:s :c ouittcc :c t|t t|c siuult:cous
c|:gcs i: :is| icto:s :c sc:si|lc, cou:c|c:si|lc :c lusi|lc i: cco:ouic
tc:us
I|c ui: c|llc:gc i: co:st:ucti:g t|csc c:isis scc::ios is t|c ict t|t t|c
:uu|c: oi :is| icto:s to |c co:sicc:cc c: |c cxt:cucl, |ig| i: wcllcivc:
siiicc o:tiolio lvc: ii it is ossi|lc to i:clucc ll :clcv:t :is| icto:s i: t|c
c:isis scc::io, su||cctivc sscssuc:t oi t|c i:tc::cltio:s|is ;co::cltio:s,
|ctwcc: t|c c|:gcs i: i:civicul :is| icto:s is |:cl, ossi|lc
lo: t|is :cso:, |,ot|cticl c:isis scc::ios c: lso |c ccvclocc s,stcu
ticll, wit| v:ious ut|cuticl tools :c uct|ocs
11.
6.4.4 Performing and Evaluating Stress Tests
:cc t|c c:isis scc::ios, t|c ccou:,i:g :is| icto:s, :c t|c sizc oi t|c
c|:gcs i: t|osc icto:s |vc |cc: ccii:cc, it is :cccss:, to :ccvlutc t|c
c:ccit o:tiolio usi:g t|csc scc::ios li t|c |:| uscs qu:tittivc uoccls, it
c: c:io:u t|c st:css tcsts |, c|usti:g t|c :clcv:t i:ut icto:s ;:is| icto:s,
li :o qu:tittivc uoccls cxist, it is still ossi|lc to c:io:u st:css tcsts
lowcvc:, i: suc| cscs t|c, will :cqui:c g:ctc: ciio:t |ccusc t|c ciiccts o:
t|c c:ccit o:tiolio c: o:l, |c cstiutcc :oug|l, i: qulittivc tc:us
115
See MONETARY AUTHORITY OF SINGAPORE, Credit Stress-Testing, p. 4244.
Reporting and Countermeasures
:cc t|c st:css tcsts |vc |cc: c::icc out, it is :cccss:, to :co:t t|c :csults
to t|c :clcv:t lcvcls oi u:gcuc:t l: t|is co:tcxt, it is c:ucil to :csc:t
o:l, t|osc :csults w|ic| :c t:ul, cccisivc uc| :co:ts s|oulc covc: t|c :csults
oi :outi:c st:css tcsts s wcll s t|osc oi :cw tcsts |scc scciiicll, o: t|c :c
vili:g cco:ouic situtio: I|c t:gctcc sclcctio: oi cccisivc :csults will lso
icilittc t|c :occss oi ccvcloi:g cou:tc:ucsu:cs l: o:cc: to cc:ivc cou:
tc:ucsu:cs i:ou st:css tcsts, t|c tcsts |vc to |c ccsig:cc i: suc| w, t|t
t|c, c:|lc cusl :l,sis
Adaptation and Ongoing Development of Stress Tests
As t|c o:tiolio couositio: s wcll s cco:ouic :c oliticl co:citio:s
c|:gc co:st:tl,, it is lso :cccss:, to ct st:css tcsts o: : o:goi:g |sis
I|is oi:t is cccisivc i: c:su:i:g lusi|lc :csults i:ou w|ic| suit|lc cou:tc:
ucsu:cs c: |c cc:ivcc
III ESTIMATING AND VALIDATING LGD/EAD AS
RISK COMPONENTS
7 Estimating Loss Given Default (LGD)
W|ilc it is couuo: :cticc i: u:, |:|s to clcultc lDs wit|out usi:g t|c
:csults to clcultc lscl ll :cgulto:, citl :cqui:cuc:ts, t|csc i:stitutio:s
:c :ow lso iocusi:g o: cstiuti:g lGD :c lAD cuc to t|c :cqui:cuc:ts
oi lscl ll lt is :ot ossi|lc to ciscuss t|c cstiutio: oi t|csc two :uctc:s
wit|out :cic::i:g to lscl ll, s :o i:ccc:cc:t co:ccts |vc |cc: ccvclocc
i: t|is iiclc to ctc I|c:cio:c, i:stitutio:s w|ic| l: to iulcuc:t t|ci: ow:
lGD cstiutio: :occcu:cs i: couli:cc wit| t|c c:it lD ci:cctivc icc
:uu|c: oi sccil c|llc:gcs li:st, i: co:t:st to lD cstiutcs, lGD cstiu
tio: :occcu:cs c::ot :cl, o: ,c:s oi :cticl cxc:ic:cc o: cst|lis|cc
i:cust:, st:c:cs cco:c, u:, i:stitutio:s co :ot |vc cou:c|c:sivc loss
ct|scs t t|ci: cisosl
I|is c|tc: :csc:ts otc:til solutio:s io: |:|s` i:|ousc cstiutio: oi
lGD s wcll s t|c cu::c:t sttc oi ccvclouc:t i: t|is :c Wc c::ot cliu
t|t t|is c|tc: :csc:ts co:clusivc ciscussio: oi lGD cstiutio: o: t|t t|c
:occcu:c :csc:tcc is suit|lc io: ll co:cciv|lc o:tiolios l:stcc, t|c o||cc
tivc oi t|is c|tc: is to c:cou:gc |:|s to u:suc t|ci: ow: :oc|cs to
iu:ovi:g lGD cstiutcs
I|c lGD cstiutio: :occcu:c is illust:tcc i: c|:t 0 |clow
|:t 0 lGD lstiutio: l:occcu:c
l: t|is c|tc:, wc cc:ivc t|c loss :uctc:s o: t|c |sis oi t|c ccii:itio:s
oi cciult :c loss :csc:tcc i: t|c c:it lD ci:cctivc :c t|c: li:| t|cu to t|c
ui: scguc:ttio: v:i|lcs icc:tiiicc custouc:s, t::sctio:s, :c colltc:l
Wc t|c: ciscuss :occcu:cs w|ic| :c suit|lc io: lGD cstiutio: li:ll,, wc
:csc:t :uu|c: oi :oc|cs to iulcuc:ti:g lGD cstiutio: uct|ocolo
gics o: t|is |sis
7.1 Definition of Loss
A clc: ccii:itio: oi cciult is |sic :c:cquisitc io: cstiuti:g loss givc:
cciult I|c lscl llcouli:t ccii:itio: oi cciult uscc io: clculti:g lD
;scc scctio: .1!, lso lics i: t|is co:tcxt
11o
I|c scco:c u|o: :c:cquisitc is ccii:itio: oi t|c tc:u loss loss givc:
cciult |s |cc: ccii:cc i: v:ious w,s i: :cticc :c i: t|c litc:tu:c to ctc
I|c c:it lD ci:cctivc c:ctcs u:iio:u |sis wit| its ccii:itio: oi loss i: lGD
cstiutio:
For the purpose of LGD estimation, the term loss shall mean economic loss. The
measurement of economic loss should take all relevant factors into account, including
material discount effects, and material direct and indirect costs associated with col-
lecting on the instrument.
117
lo: lGD cstiutio:, t|c usc oi t|is ccii:itio: uc:s t|t it is lso :cccss:,
to t|c losscs :isi:g i:ou :cst:uctu:cc c:ccit icilitics i:to ccou:t ;i: ccitio:
to liquictcc c:ccit icilitics, I|csc icilitics gc:c:ll, i:volvc lowc: lcvcl oi
loss t|: liquictcc icilitics ut oi |usi:css co:sicc:tio:s, |:|s o:l, ot io:
:cst:uctu:i:g ;ossi|l, wit| :til w:itcoii, ii t|c :o||lc loss i: t|c csc oi
succcssiul :cst:uctu:i:g is lowc: t|: i: t|c csc oi liquictio: Acco:ci:gl,,
t|i:g o:l, liquictcc icilitics i:to ccou:t i: lGD cstiutio: woulc lcc to
su|st:til cxggc:tio: oi loss lo: t|is :cso:, it is c:ucil to co:sicc: ll
cciultcc c:ccit icilitics ;i:cluci:g icilitics :ccovc:cc i:ou cciult,, csccill,
i: t|c ct collcctio: :occss
7.2 Parameters for LGD Calculation
lscc o: t|c ccii:itio: oi loss givc: |ovc, t|is scctio: icc:tiiics t|c :clcv:t
loss couo:c:ts w|ic| u, |c i:cu::cc i: c:ccit cciult I|csc loss couo
:c:ts io:u t|c |sis io: lGD cstiutio: Dcc:ci:g o: t|c t,c oi liquictio:
o: :cst:uctu:i:g, :ot ll loss couo:c:ts will |c :clcv:t
As t|c c:it lD ci:cctivc llows ooli:g i: t|c :ctil scguc:t, t|c loss
:uctc:s :c ciscusscc sc:tcl, io: :ctil :c :o::ctil scguc:ts
7.2.1 LGD-Specific Loss Components in Non-Retail Transactions
I|c cssc:til couo:c:ts oi loss :c t|c uou:t :ccciv|lc to |c w:ittc: oii
itc: :cliztio:, i:tc:cst loss, :c liquictio: costs I|c :cltio:s|i |ctwcc:
lAD, lGD :c t|c i:civicul loss couo:c:ts is :csc:tcc i: c|:t 1
lo: iu:t|c: co:sicc:tio: oi t|c loss couo:c:ts, wc :ccouuc:c cs|
ilow|scc c:scctivc l: suc| c:scctivc, :, iu:t|c: ,uc:ts :c
:cg:ccc s costs :c ,uc:ts :cccivcc ;:ccovc:ics, o: t|c |sis oi lAD Acci
tio:l ,uc:ts :cccivcc cssc:till, :cic: to t|c :t oi t|c uou:t :ccciv|lc
w|ic| |s :ot ,ct |cc: w:ittc: oii :c io: w|ic| co::cso:ci:g :ctu:: ilowoi
iu:cs is cxcctcc I|c u:cc:l,i:g tiuc c:iocs io: t|c lost ,uc:ts cit|c:
:csult i:ou t|c o:igi:ll, g:ccc i:tc:cst :c :i:cil :c,uc:t ctcs o: |vc
116
Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Article 1, No. 46, and Annex D-5,
No. 43.
117
|:t 1 loss ouo:c:ts i: lGD
to |c cstiutcc cxlicitl,, s i: t|c csc oi :ccovc:ics I|c sclcctio: oi t|c cis
cou:ti:g icto: o: icto:s ccc:cs o: t|c ccsi:cc lcvcl oi :ccisio: |:t !
illust:tcs t|is cs| ilow|scc c:scctivc
|:t ! lGD i: t|c s| llowlscc lc:scctivc
Book Value Loss/Recoveries
W|c: clculti:g |oo| vluc loss ;ic t|c uou:t :ccciv|lc,, it is :cccss:, to
ciiic:c:titc |ctwcc: :cst:uctu:i:g :c liquictio: l: t|c csc oi :cst:uctu:i:g,
t|c |oo| vluc loss :csults i:ou :til w:itcoii, :c i: t|c csc oi liquictio:
t|is loss is cqul to lAD lcss :ccovc:ics As sscts :c :ot :clizcc i: t|c cou:sc
oi lo: :cst:uctu:i:g, t|c uou:t oi :til w:itcoii c: v:, wiccl, :c c:
:ot |c clcultcc o: t|c |sis oi cxcctcc :ccovc:ics l:ou t|c |usi:css c:
scctivc, :cst:uctu:i:g gc:c:ll, o:l, u|cs sc:sc i: cscs w|c:c t|c loss cuc
to t|c :til w:itcoii is lowc: t|: i: t|c csc oi liquictio: I|c ot|c: loss
couo:c:ts :otwit|st:ci:g, :til w:itcoii cocs :ot u|c sc:sc io: cscs
oi coulctc colltc:liztio:, s t|c |:| woulc :cccivc t|c c:ti:c uou:t
:ccciv|lc ii t|c colltc:l wc:c :clizcc I|c:cio:c, t|c cxcctcc |oo| vluc
loss :isi:g i:ou liquictio: is gc:c:ll, t|c uc: liuit io: cstiutcs oi t|c :
til w:itcoii
As t|c |oo| vluc loss i: t|c csc oi liquictio: is uc:cl, t|c ciiic:c:cc
|ctwcc: lAD :c :ccovc:ics, t|c ctul c|llc:gc i: cstiuti:g |oo| vluc loss
is t|c clcultio: oi :ccovc:ics l: t|is co:tcxt, wc uust u|c iu:cuc:tl
cisti:ctio: |ctwcc: :cliztio: i: |:|:utc, :occcci:gs :c t|c :cliztio:
oi colltc:l As :ulc, t|c |:| |s cliu to |:|:utc, civicc:c u:lcss
t|c |:|:utc, ctitio: is cisuisscc io: lc| oi sscts l: t|c csc oi colltc:l
g:ccuc:t, |owcvc:, t|c |:| |s ccitio:l clius w|ic| c: isoltc t|c col
ltc:l i:ou t|c |:|:utc, csttc ii t|c |o::owc: :oviccc t|c colltc:l i:ou
its ow: sscts I|c:cio:c, colltc:l :ccuccs t|c vluc oi t|c |:|:utc, csttc,
:c t|c :ccuccc |:|:utc, sscts lowc: t|c :ccovc:, :tc l: t|c sovc:cig:s
cc:t:l govc::uc:ts, |:|si:stitutio:s :c l:gc co:o:tcs scguc:ts, u:sc
cu:cc lo:s :c souctiucs g::tcc cuc to t|c |o::owc:`s u:|ct st:ci:g o:
t|c scciiic t,c oi t::sctio: l: t|c ucciuusizcc to sull co:o:tc cus
touc: scguc:t, |:| lo:s gc:c:ll, i:volvc colltc:l g:ccuc:ts l: t|is cus
touc: scguc:t, t|c sccu:cc cc|t citl o:tio: co:stitutcs co:sicc:|lc :t
oi t|c liquictio: vluc, uc:i:g t|t t|c :ccovc:, :tc will tc:c to t|c o:
scco:c:, sttus i: iu:t|c: :l,sis
A l:gc :uu|c: oi icto:s cctc:ui:c t|c uou:t oi t|c :cscctivc :ccovc:
ics lo: t|is :cso:, it is :cccss:, to |:c| cow: :ccovc:ics i:to t|ci: cssc:til
cctc:ui:i:g icto:s
|:t ! lcto:s Dctc:ui:i:g kccovc:ics
I|c oi:t oi cc:tu:c i: cstiuti:g :ccovc:ics is t|c icc:tiiictio: oi t|c
sscssuc:t |sc I|is is t|c colltc:l vluc i: t|c csc oi colltc:l :cliztio:
:c t|c liquictio: vluc oi t|c c:tc::isc i: t|c csc oi |:|:utc, :occcc
i:gs l: t|c ii:st stc, it is :cccss:, to cstiutc t|csc vlucs t t|c tiuc oi
cciult, s t t|t tiuc t|c |:| o: |:|:utc, cui:ist:to: :cccivcs t|c owc:
oi cisosl ovc: t|c sscts to |c :clizcc l: t|is co:tcxt, it is :cccss:, to u:|
cow: t|c colltc:l vluc t t|c tiuc oi cciult, csccill, io: t:gi|lc iixcc
sscts, s t|c c:gc: cxists t|t ucsu:cs to ui:ti: t|c vluc oi sscts u,
|vc |cc: :cglcctcc |cio:c t|c cciult cuc to liquicit, co:st:i:ts
As t|c vluc oi sscts u, iluctutc cu:i:g t|c :cliztio: :occss, t|c :i
u:, sscssuc:t |sc uscc |c:c is t|c colltc:l vluc o: liquictio: vluc t t|c
tiuc oi :cliztio: As :cg:cs gu::tccs o: su:ct,s|is, it is :cccss:, to c|cc|
t|c tiuc u:til suc| gu::tccs c: |c cxc:ciscc s wcll s t|c c:ccit st:ci:g
;:o||ilit, oi cciult, oi t|c :t, :ovici:g t|c gu::tcc o: su:ct,
A:ot|c: iuo:t:t couo:c:t oi :ccovc:ics is t|c cost oi :cliztio: o:
|:|:utc, I|is itcu co:sists oi t|c ci:cct costs oi colltc:l :cliztio: o:
|:|:utc, w|ic| u, |c i:cu::cc cuc to uctio:cc:s` couuissio:s o: t|c
couc:stio: oi t|c |:|:utc, cui:ist:to:
lt u, lso |c :cccss:, to ciscou:t t|c u:|ct :icc cuc to t|c liuitcc liq
uictio: |o:izo:, csccill, ii it is :cccss:, to :clizc sscts i: illiquic u:|cts
o: to iollow scciiic :cliztio: :occcu:cs
Interest Loss
l:tc:cst loss cssc:till, co:sists oi t|c i:tc:cst ,uc:ts lost i:ou t|c tiuc oi
cciult o:w:c l: li:c wit| t|c :l,sis |ovc, t|c :csc:t vluc oi t|csc losscs
c: |c i:cluccc i: t|c loss :oiilc l: cscs w|c:c uo:c :ccisc loss :oiilc is
:cqui:cc, it is ossi|lc to cxui:c i:tc:cst loss uo:c closcl, o: t|c |sis oi t|c
iollowi:g couo:c:ts
kcii::ci:g costs u:til :cliztio:
l:tc:cst ,uc:ts lost i: csc oi :ovisio:sw:itcoiis
o:tu:it, costs oi cquit,
Workout Costs
l: t|c csc oi wo:|out costs, wc c: gi: cisti:guis| |ctwcc: t|c :occssi:g
costs i:volvcc i: :cst:uctu:i:g :c t|osc i:volvcc i: liquictio: lscc o:
t|c ccii:itio: oi cciult uscc |c:c, t|c :cst:uctu:i:g oi c:ccit icilit, c: t|c
o: v:ious lcvcls oi i:tc:sit, kcst:uctu:i:g ucsu:cs ::gc i:ou :ic :c:cgo
titio: oi t|c couuituc:t to lo:gtc:u, i:tc:sivc sc:vici:g
l: t|c csc oi liquictio:, t|c ucsu:cs t|c: |, |:| c: lso v:, wiccl,
i: tc:us oi t|ci: i:tc:sit, Dcc:ci:g o: t|c ccg:cc oi colltc:liztio: :c t|c
sscts to |c :clizcc, t|c scoc oi t|csc ucsu:cs c: ::gc i:ou ci:cct w:itc
oiis to t|c coulctc liquictio: oi uultilc colltc:l sscts lo: u:sccu:cc
lo:s :c l:gc: c:tc::iscs, t|c ui: cu|sis tc:cs to |c o: |:|:utc, :o
cccci:gs u:gcc |, t|c |:|:utc, cui:ist:to:, w|ic| :ccuccs t|c |:|`s
i:tc::l :occssi:g costs
7.2.2 LGD-Specific Loss Components in Retail Transactions
Dcc:ci:g o: t|c t,c :c scoc oi |:|`s :ctil |usi:css, it u, |c :cccss:,
to u|c cisti:ctio: |ctwcc: ussu:|ct |:|i:g :c :ivtc |:|i:g i: t|is
co:tcxt :c cssc:til c|:ctc:istic oi ussu:|ct |:|i:g is t|c ict t|t it is
ossi|lc to cou|i:c l:gc :uu|c:s oi :cltivcl, sull cxosu:cs i: |ouogc:ous
g:ous :c to t:ct t|cu s ools I|is c:scctivc cocs :ot |vc to covc: ll oi
t|c scciiic c|:ctc:istics oi :ctil custouc:s :c t::sctio:s, w|ic| uc:s
t|t i: t|c csc oi :ivtc |:|i:g custouc:s it u, |c :o:itc to vicw loss
usi:g :oc|cs licc to :o::ctil custouc:s
Wit| :cg:c to ooli:g i: ussu:|ct |:|i:g, lscl ll :cqui:cs t|c iollow
i:g ui:iuuu scguc:ttio:
11
lxosu:cs sccu:cc |, :cl csttc
Qulii,i:g :cvolvi:g :ctil cxosu:cs
All ot|c: :ctil cxosu:cs
lc,o:c t|is |sic scguc:ttio:, |:|s c: lso scguc:t cxosu:cs cco:ci:g
to ccitio:l c:itc:i l: t|is co:tcxt, it u, lso |c sc:si|lc i:ou |usi:css
:cscctivc to su|civicc cxosu:cs iu:t|c: |, :ocuct t,c :c ccg:cc oi col
ltc:liztio: :c cssc:til :cqui:cuc:t is t|t cc| g:ou co:sists oi l:gc
:uu|c: oi |ouogc:ous cxosu:cs
11-
Duc to t|c ooli:g oi cxosu:cs, scciiic t::sctio:s :c t|us lso t|ci:
otc:til :ccovc:ics c: :o lo:gc: |c :cg:ccc i:civicull, Acco:ci:gl,,
ooli:g u|cs it ossi|lc to l, t|c ool`s |isto:icl |oo| vluc loss c:cc:t
gc, w|ic| lics cqull, to ll t::sctio:s i: ool I|is is lso t|c csc io:
t|c two ot|c: loss :uctc:s ;i:tc:cst loss :c :occssi:g costs, I|c t|lc
|clow givcs : ovc:vicw oi t|c loss couo:c:ts :clcv:t to ussu:|ct |:|
i:g
|:t + loss ouo:c:ts i: \ss\:|ct l:|i:g
7.3 Identifying Information Carriers for Loss Parameters
lo: t|c u:osc oi sclccti:g :c sscssi:g i:civicul uct|ocs oi cstiuti:g
lGD, it is :cccss:, to icc:tii, t|c ui: i:io:utio: c::ic:s io: cc| loss
:uctc: l:c|i:g cow: loss :uctc:s i:to t|ci: sc:tc couo:c:ts c:
|lcs ci:cct ssig:uc:t :c t t|c suc tiuc :ccuccs coulcxit, i: t|c lic
tio: oi cstiutio: uct|ocs
7.3.1 Information Carriers for Specific Loss Parameters
Non-Retail Information Carriers
I|c iollowi:g i:io:utio: c::ic:s :c :clcv:t to t|c loss :uctc:s i: :o:
:ctil |usi:css
Customers: :ccitwo:t|i:css i:io:utio:, ssig:cc colltc:l :c t::sc
tio:s, custouc: ustc: ct ;custouc: t,c, i:cust:,, :cgio:, ctc,
118
119
Collateral: olltc:l vluc, colltc:l ustc: ct ;colltc:l t,c, colltc:l
:ovicc:, ctc,,
Transactions: loo| vluc, ssig:cc colltc:l, t::sctio: ustc: ct ;:oc
uct t,c, i:tc:cst :tc, :c,uc:t st:uctu:c, ctc,
I|c t|lc |clow s|ows |ow i:io:utio: c::ic:s :c ssig:cc to loss :u
ctc:s
|:t . Assig:uc:t oi l:io:utio: ::ic:s to loss l:uctc:s ;:o:kctil,
lo: t|c u:osc oi cstiuti:g t|c :ccovc:ics i:ou |:|:utc,, it is :cccss:,
to usc custouc:scciiic ct lscc o: t|c custouc: t,c :c cou:t:, oi cou
icilc, t|c |:| c: cstiutc w|ct|c: |:|:utc, :occcci:gs will |:i:g i: :,
:clcv:t ,uc:ts, io: cxulc I|c custouc:`s i:cust:, :c c:ccitwo:t|i:css
u, lso c:|lc co:clusio:s s to t|c t,c oi sscts, t|ci: |ilit, to |c :clizcc,
:c t|c :cliztio: c:ioc olltc:l c: lso :ovicc i:io:utio: o: w|ct|c:
:cliztio: i: |:|:utc, :occcci:gs is oi utc:il :clcv:cc to t|c |:|
lo: t|c u:osc oi cstiuti:g t|c :occccs i:ou colltc:l :cliztio:, col
ltc:l ct c: :ovicc i:io:utio: s to t|c :clcv:t uc:s oi :cliztio:, t|c
:cliztio: c:ioc i: t|c co::cso:ci:g u:|cts, s wcll s t|c voltilit, :c liq
uicit, oi t|osc u:|cts
lculti:g i:tc:cst loss :cqui:cs t::sctio:scciiic i:io:utio:, suc| s
t|c g:ccc i:tc:cst :tc li uo:c :ccisc clcultio:s :c :cqui:cc, it is lso os
si|lc to usc t|c t:gct costs clcultcc i: co:t:i|utio: u:gi: :l,sis \o:c
ovc:, u:|ct i:tc:cst :tcs :c |:|scciiic i:tc:cst clius c: lso |c i:cluccc
i: t|csc clcultio:s
lt is ossi|lc to clcultc :occssi:g costs :c gc:c:l cxc:scs io: t::sc
tio: t,cs s wcll s custouc: t,cs cco:ci:g to t|c t,c :c scoc oi cost
ccou:ti:g Dcc:ci:g o: t|c lcvcl oi cctil i: cost cc:tc: :co: cost u:it
ccou:ti:g, it is ossi|lc to clcultc costs cow: to t|c lcvcl oi i:civicul t::s
ctio:s l: t|is w,, io: cxulc, t|c costs oi colltc:l :cliztio: c: |c
ssig:cc to i:civicul t::sctio:s |, w, oi t|c t::sctio:scciiic cccictio:
oi colltc:l I|c costs oi :clizi:g custouc:scciiic colltc:l c: |c lloctcc
to t|c custouc:`s t::sctio:s :it|ucticll, o: usi:g scciiic lloctio: |c,
Retail Information Carriers
D:lcss t|c loss couo:c:ts i: :ctil t::sctio:s :c ccictcc s t|c, :c i: t|c
:o::ctil scguc:t, t|c collcctivc |:|i:g |oo| ccou:t io: t|c ool to w|ic|
t|c t::sctio:s :c ssig:cc c: sc:vc s t|c ui: sou:cc oi i:io:utio: I|c
scguc:ttio: oi t|c ool c: go |c,o:c t|c ui:iuuu scguc:ttio: :cqui:cc |,
t|c c:it lD ci:cctivc :c :ovicc io: uo:c cctilcc clssiiictio: cco:ci:g to
v:ious c:itc:i, i:cluci:g ccitio:l :ocuct t,cs, ui: colltc:l t,cs,
ccg:ccs oi colltc:liztio: o: ot|c: c:itc:i lo: cc| oi t|c loss :uctc:s
listcc |clow, it is cvis|lc to ccii:c sc:tc collcctivc ccou:t io: cc| ool
|:t o Assig:uc:t oi l:io:utio: ::ic:s to loss l:uctc:s ;kctil,
7.3.2 Customer Types
As custouc: t,cs :c :cqui:cc i: o:cc: to clcultc losscs cuc to |:|:utc, o:
couositio: :occcci:gs, it is cvis|lc to ccii:c iu:t|c: su|civisio:s io: t|csc
t,cs |ccusc t|c :tu:c :c scoc oi |:|:utc, :occcci:gs ccc:c |cvil,
o: t|c custouc: t,c I|c scguc:ttio: s|ow: |clow is cssc:till, |scc o:
t|c custouc: scguc:ttio: ccsc:i|cc io: lD cstiutio: c:lic:
: t|c |sis oi t|is scguc:ttio:, it is l:cc, ossi|lc to cc:ivc t|c uost
cssc:til i:io:utio: io: iu:t|c: cstiutcs oi |:|:utc, :occccs l: t|c csc
oi co:o:tc custouc:s, t|c i:cust:, i: w|ic| t|c, oc:tc :oviccs iuo:t:t
ccitio:l i:io:utio: wit| w|ic| t|c |:| c: cstiutc t|c vluc co:tc:t :c
liquicit, oi sscts, io: cxulc lc,o:c t|c i:io:utio: uc:tio:cc |ovc, lc:c
c:s c: o:l, gi: ccitio:l i:sig|t t|:oug| uo:c cctilcc :l,sis oi cciultcc
custouc:s siuil: to t|c :l,sis c:io:ucc i: o:cc: to cvlutc cou:,
w|c: cctc:ui:i:g its liquictio: vluc
|:t vc:vicw oi ustouc: I,cs
7.3.3 Types of Collateral
l: o:cc: to cctc:ui:c colltc:l :ccovc:ics, it is cvis|lc to ctcgo:izc collt
c:l usi:g t|c iollowi:g t,cs
|:t vc:vicw oi olltc:l I,cs
I|c vluc oi colltc:l io:us t|c |sis io: clculti:g colltc:l :ccovc:ics
:c c: cit|c: |c vil|lc s :oui:l vluc o: u:|ct vluc :oui:l vlucs
:c c|:ctc:izcc |, t|c ict t|t t|c, co :ot c|:gc ovc: t|c :cliztio: c:ioc
li t|c colltc:l is cc:oui:tcc i: cu::c:c, ot|c: t|: t|t oi t|c sccu:cc
t::sctio:, |owcvc:, it is lso :cccss:, to ccou:t io: c|:gcs i: vluc cuc to
cxc|:gc :tc iluctutio:s
As :cg:cs gu::tccs :c c:ccit cc:ivtivcs, it is :cccss:, to t|c t|c col
ltc:l :ovicc:`s cciult :o||ilit, i:to ccou:t cxlicitl, lowcvc:, wit|
:cg:c to :cgulto:, citl :cqui:cuc:ts u:cc: lscl ll, it is ossi|lc to i:clucc
t|c c:ccit :is| uitigtio: ciicct oi gu::tccs :c c:ccit cc:ivtivcs i: lD
i:stcc oi lGD cstiutcs l: suc| cscs, :ctu:: ilows oi iu:cs i:ou suc| gu:
:tccs c: :o lo:gc: |c i:cluccc i: lGD cstiutcs
l: t|c csc oi u:|ct vlucs, wc c: c:w cisti:ctio: |ctwcc: ii::cil
colltc:l :c |,sicl colltc:l li::cil colltc:l is c|:ctc:izcc |, t|c ict
t|t its vluc is gc:c:ll, i:ccc:cc:t oi t|c |o::owc:`s c:ccitwo:t|i:css :c
:ot su||cct to cc:ccitio: \o:covc:, t|c u:|cts io: ii::cil colltc:l :c
usull, i: uo:c liquic t|: t|c :cliztio: u:|cts io: |,sicl colltc:l,
:c cxtc:sivc ct|scs oi |isto:icl u:|ct :iccs :c vil|lc io: t|is t,c
oi colltc:l
l|,sicl colltc:l c: |c ciiic:c:titcc cco:ci:g to v:ious c:itc:i Iwo oi
t|c uost iuo:t:t c:itc:i :c t|c liquicit, oi t|c :clcv:t u:|cts :c t|c
cxistc:cc oi u:|ct :icc i:ccx l: ccitio:, sccts suc| s susccti|ilit,
to oo: ui:tc::cc, usciul liic, :c suoot| lcgl liquictio: :c :ticul:l,
sig:iiic:t
Wit| :cg:c to uisccll:cous colltc:l, wc c: cisti:guis| |ctwcc: slc|lc
:c :o:slc|lc sscts :o:slc|lc colltc:l suc| s sl:, ssig:uc:ts o: liic
::uitics c: o:l, |c :clizcc |, uc:s oi t|c u:cc:l,i:g ,uc:t st:cu o: |,
sclli:g t|c goocs :cccivcc :cgul:l, ovc: tiuc l: suc| cscs, t|c colltc:l`s
:csc:t vluc is su||cct to t|c suc :is|s s t|c ot|c: io:us oi colltc:l,
ccc:ci:g o: w|ct|c: t|c ,uc:t is |scc o: t|c c:ccitwo:t|i:css oi t|i:c
:t, o: o: t|c iutu:c ccvclouc:t oi t|c colltc:l`s vluc As i: t|c csc oi
|,sicl colltc:l, t|c :ccovc:ics i:ou slc|lc sscts will :csult i:ou t|c u:
|ct vluc oi t|c :ig|ts
7.3.4 Types of Transaction
Diiic:c:titi:g |, t::sctio: t,c llows uo:c cctilcc clssiiictio: oi losscs
cco:ci:g to t|c couo:c:ts i:tc:cst loss :c wo:|out costs l: t|is co:tcxt,
|:|s gc:c:ll, cisti:guis| t|c iollowi:g t,cs oi c:ccit icilitics
li:cs oi c:ccit
lo:s
o:suuc: lo:s
lcsi:g t::sctio:s
lu:c|sc oi :ccciv|lcs
lo:cs i: t|c |:|i:g |oo|
Gu::tcc c:ccit
I::sctio:s :c iu:t|c: ctcgo:izcc |,
lu:osc ;cg :cl csttc lo:, :c:tl ,uc:t gu::tcc,
I,c oi t::sctio: ;cg s,:cictcc lo:s,
I,c oi u:cc:l,i:g t::sctio: ;cg ccct:cc c:ccit,
Dcg:cc oi st:c:ciztio: ;cg :ivtc |:|i:gussu:|ct |:|i:g,
ustouc: t,c ;cg cu::c:t ccou:t, st:tu lo:,
:g:iztio:l u:its ;cg :o|cct ii::cc, s|i ii::cc,
I|is ctcgo:iztio: will ccc:c |cvil, o: t|c o:g:iztio:l st:uctu:c oi
cc| |:| l:ocuct ctlogs i:cquc:tl, list v:ious cou|i:tio:s oi t|c ctcgo
:ics uc:tio:cc |ovc
7.3.5 Linking of Collateral Types and Customer Types
l: t|c t|lc |clow, t,icl colltc:l t,cs :c ucc to i:civicul custouc:
g:ous
|:t - I,icl olltc:l io: V:ious ustouc: I,cs
lulcuc:ti:g : i:|ousc lGD cstiutio: :occcu:c s|oulc |cgi: wit| :
:l,sis oi t|c colltc:lcustouc: cou|i:tio:s w|ic| :c uost sig:iiic:t io:
t|c i:civicul |:| li:st oi ll, it is :cccss:, to c:su:c t|t t|c |sic :c:cq
uisitc oi suiiicic:t qu:tittivc :c qulittivc ct sct is iuliillcc Dcc:ci:g
o: t|c t,c :c cxtc:t oi ct :cqui:cuc:ts, colltc:l c: |c iu:t|c: su|ci
viccc cco:ci:g to its vluc co:tc:t, t|c utc:ilit, oi i:civicul colltc:l
t,cs, s wcll s t|c coulcxit, oi colltc:l g:ccuc:ts lt u, lso |c usciul
to ccii:c ctcgo:ics |scc o: t::sctio: t,cs : t|c |sis oi t|csc :cliui
::, ts|s, it is t|c: ossi|lc to sclcct t|c :o:itc lGD cstiutio: uct|oc
scciiicll, io: cc| loss :uctc: I|csc uct|ocs :c :csc:tcc i: t|c :cxt
scctio:
7.4 Methods of Estimating LGD Parameters
l: t|is scctio:, wc givc gc:c:l :csc:ttio: oi t|c :occcu:cs cu::c:tl, |ci:g
ciscusscc :co: uscc i: lGD cstiutio: cctio: . t|c: givcs scciiic
licc cxulcs oi |ow t|c loss couo:c:ts :c cstiutcc i: :cticc
l: gc:c:l, wc c: ciiic:c:titc tocow: :c |ottouu :oc|cs to
lGD cstiutio:
7.4.1 Top-Down Approaches
Iocow: :oc|cs usc i:ccl, vil|lc u:|ct ct to cc:ivc lGD |, clc:s
i:g o: |:c|i:g cow: t|c coulcx cxtc::l i:io:utio: vil|lc, suc| s :ccov
c:, :tcs o: cxcctcc loss I|is c: |c co:c i: two w,s
Dsi:g cxlicit loss ct
Dsi:g iulicit loss ct
lo: t|c s|c oi coulctc:css, it is wo:t| :oti:g |c:c t|t t|c c:it lD ci:cc
tivc uc:tio:s :ot|c: uct|oc i: ccitio: to t|csc two uct|ocs oi clculti:g
lGD i:ou cxtc::l ct lo: u:c|scc co:o:tc :ccciv|lcs :c i: t|c :ctil
scguc:t, lGD c: lso |c cstiutcc o: t|c |sis oi i:tc::ll, vil|lc loss ct
;cxcctcc loss, ii suit|lc cstiutcs oi cciult :o||ilit, :c ossi|lc
Explicit Loss Data
I|c:c :c two ossi|lc w,s to usc cxlicit loss ct I|c ii:st ossi|ilit, is to
usc |isto:icl loss i:io:utio: ;suc| s :ccovc:, :tcs io: |o:cs, :oviccc |,
sccilizcc gc:cics I|c :ccovc:, :tc co::cso:cs to t|c i:solvc:c, ,out
:c i:cictcs t|c uou:t :ciu|u:scc i: |:|:utc, :occcci:gs s c:cc:t
gc oi t|c :oui:l uou:t :ccciv|lc lGD c: t|c: |c clcultcc usi:g t|c
iollowi:g io:uul
1G1 1 1cco.ciy 1otc
listo:icl :ccovc:, :tcs :c cu::c:tl, vil|lc i: l:gc qu:titics, :ccou
i::tl, io: D |o:cs :c co:o:tc lo:s l: ccitio:, loss ct :c lso vil|lc
o: |:|s :c govc::uc:ts lvc: ii t|c ccii:itio:s oi loss :c cciult :c co:
sistc:t, t|csc ct :o||l, o:l, l, to |o::owc:s i:ou Aust:i: |:|s to
liuitcc cxtc:t lo: cxulc, sccts suc| s colltc:liztio:, |:|:utc, :o
cccu:cs, |l:cc s|cct st:uctu:cs, ctc :c :ot lw,s cou:|lc I|c:cio:c,
|isto:icl :ccovc:, :tcs i:ou t|c citl u:|ct :c gc:c:ll, o:l, suit|lc
io: u:sccu:cc t::sctio:s wit| govc::uc:ts, i:tc::tio:l ii::cil sc:vicc
:ovicc:s :c l:gc i:tc::tio:l cou:ics
\o:covc:, cuc to t|c ccii:itio: oi loss uscc |c:c, t|c :cltio: lGD 1
:ccovc:, :tc is :ot :cccss:il, c:su:cc i ll loss :uctc:s, o:l, t|c |oo|
vluc loss is coulctcl, covc:cc |, t|is :cltio: Wit| :cg:c to i:tc:cst loss,
t|c :cu:|s |ovc o:l, covc: t|c i:tc:cst owcc itc: t|c cciult, s t|is i:tc:cst
i:c:cscs t|c c:ccito:`s cliu I|c ot|c: couo:c:ts oi i:tc:cst loss :c scciiic
to i:civicul |:|s :c :c t|c:cio:c :ot i:cluccc As :cg:cs wo:|out costs,
o:l, t|c costs :cltcc to |:|:utc, cui:ist:tio: :c i:cluccc, cco:ci:gl,,
ccitio:l costs to t|c |:| :c :ot covc:cc i: t|is :c I|csc couo:c:ts |vc
to |c sulcuc:tcc i: o:cc: to o|ti: coulctc lGD cstiutc
I|c scco:c ossi|ilit, i:volvcs t|c ci:cct usc oi scco:c:, u:|ct :iccs
I|c cst|lis|cc st:c:c is t|c u:|ct vluc !0 c,s itc: t|c |o:c`s cciult
l: t|is co:tcxt, t|c u:cc:l,i:g |,ot|csis is t|t t|c u:|ct c: l:cc, cstiutc
ctul :ccovc:, :tcs t t|t oi:t i: tiuc :c t|t t|is u:iicsts itscli cco:c
i:gl, i: t|c :icc D:cc:ti:t, s to t|c ctul |:|:utc, :ccovc:, :tc is t|c:c
io:c :cilcctcc i: t|c u:|ct vluc
Wit| :cg:c to u:|ct :iccs, t|c suc :cqui:cuc:ts :c liuittio:s l,
to t::sic:|ilit, s i: t|c csc oi :ccovc:, :tcs li|c :ccovc:, :tcs, scco:c:,
u:|ct :iccs co :ot co:ti: ll oi t|c couo:c:ts oi cco:ouic loss cco:c:,
u:|ct :iccs i:clucc : iulicit :cuiuu io: t|c u:cc:ti:t, oi t|c ctul
:ccovc:, :tc I|c u:|ct :icc is uo:c co:sc:vtivc t|: t|c :ccovc:, :tc,
t|us t|c io:uc: u, |c :cic:|lc
Implicit Loss Data
W|c: iulicit loss ct :c uscc, lGD cstiutcs :c cc:ivcc i:ou coulcx
u:|ct i:io:utio: o: t|c |sis oi vc:iiicc o: co:|cctu:cc :cltio:s|i
|ctwcc: t|c u:cc:l,i:g ct :c lGD l: t|is co:tcxt, it is ossi|lc to utilizc
:ot o:l, i:io:utio: o: cciultcc lo:s |ut lso ct o: t::sctio:s w|ic|
:c :ot ovc:cuc I|c two |cst|:ow: ct clcuc:ts :c c:ccit :is| s:ccs
:c :ti:gs W|c: c:ccit :is| s:ccs :c uscc, t|c ssuutio: is t|t t|c s:cc
cctc:ui:cc |ctwcc: t|c ,iclc oi t:ccc |o:c :c t|c co::cso:ci:g :is|i:cc
i:tc:cst :tc is cqul to t|c cxcctcc loss ;ll, oi t|c issuc li lD is |:ow:, it is
t|c: ossi|lc to clcultc lGD usi:g t|c cqutio: ll ;, lD lGD I|is
:cqui:cs t|t lD c: |c clcultcc wit|out u|iguit, li : cxtc::l o: i:tc::l
:ti:g is vil|lc, it c: |c ssig:cc to lD o: lD i:tc:vl As cxtc::l :ti:gs
:c souctiucs cqul to ll, it is :cccss:, to c:su:c t|t t|c :ti:g uscc |s
clc: :cltio:s|i to lD, :ot to ll
l: t|c cc:ivtio: oi lGD i:ou c:ccit :is| s:ccs, t|c suc gc:c:l :cqui:c
uc:ts :c liuittio:s l, s i: t|c csc oi cxlicit ct itl u:|ct ct
:c o:l, vil|lc o: cc:ti: custouc: g:ous :c t::sctio: t,cs, t|us t|c
t::sic:|ilit, oi ct |s to |c :cvicwcc i: lig|t oi gc:c:l cco:ouic co:
citio:s l: ccitio:, it uust |c ossi|lc to cxt:ct t|c iulicit i:io:utio:
co:ti:cc i: t|csc ct li t|c c:ccit :is| s:cc co::cso:cs to ll, it is to
|c qu:tiiicc s ll I|c v:,i:g liquicit, oi u:|cts i: :ticul: u|cs t|is
uo:c ciiiicult \o:covc:, : u:u|iguous lD vluc |s to |c vil|lc, t|t
is, :, :ti:gs uscc to cc:ivc lD uust :ot co:ti: iulicit lGD sccts s wcll
I|is uc:s t|t t|c :ti:gs |vc to |c u:c |o::owc: :ti:gs, :ot t::sctio:
:ti:gs :tu:ll,, c:ccit :is| s:ccs co :ot co:ti: |:|scciiic loss couo
:c:ts, t|is is :logous to t|c usc oi cxlicit loss ct i:ou scco:c:, u:|ct
:iccs ;scc :cvious scctio:,
l: tocow: :oc|cs, o:c oi t|c |ig|cst :io:itics is to c|cc| t|c t::s
ic:|ilit, oi t|c u:|ct ct uscc I|is lso lics to t|c co:sistc:c, oi cciult
:c loss ccii:itio:s uscc, i: ccitio: to t::sctio: t,cs, custouc: t,cs, :c
colltc:l t,cs As u:|ct ct :c uscc, t|c i:io:utio: cocs :ot co:ti:
|:|scciiic loss ct, t|us t|c :csulti:g lGDs :c uo:c o: lcss i:coulctc
:c |vc to |c ctcc cco:ci:g to |:|scciiic c|:ctc:istics
l: lig|t oi t|c liuittio:s cxli:cc |ovc, usi:g tocow: :oc|cs io:
lGD cstiutio: is |cst suitcc io: u:sccu:cc t::sctio:s wit| govc::uc:ts,
i:tc::tio:l ii::cil sc:vicc :ovicc:s :c l:gc citl u:|ct cou:ics
7.4.2 Bottom-Up Approaches
lottouu :oc|cs i:volvc cou:cssi:g scciiic i:io:utio: o: t|c t|:cc
loss :uctc:s i:to : lGD vluc I|is :l,sis is |scc o: t|c ssuutio:
oi v:ious scc::ios ccsc:i|i:g |ow t|c cxosu:c will ccvclo itc: t|c cciult
lossi|lc scc::ios i:clucc
oulctc sc:vici:g oi t|c outst:ci:g cc|t, ossi|lc :c:cgotitio: oi tc:us
:c :ctu::i:g t|c lo:`s sttus i:ou cciultcc to t|c :o:ul ::gc
kcst:uctu:i:g oi t|c lo: wit| c:ctio: oi :til :ovisio:s
liquictio: oi t|c lo: wit| :cliztio: oi colltc:l
liquictio: oi t|c lo: wit|out colltc:l
I|c iollowi:g uct|ocs :c cu::c:tl, |ci:g iulcuc:tcc o: ciscusscc io:
t|c i:civicul loss :uctc:s i: lGD cstiutio:
|:t -0 loss l:uctc:s :c lstiutio: \ct|ocs
lGD clcultio: is |scc o: cstiutcs oi i:civicul loss :uctc:s l: t|is
:occss, it is :cccss:, to ciiic:c:titc t lcst |, i:civicul custouc: t,c, col
ltc:l t,c, :c t::sctio: t,c cco:ci:g to t|c givc: lcvcl oi utc:ilit, li
t|c cxisti:g loss |isto:, cocs :ot llow t|c ci:cct cstiutio: oi :uctc:s, it is
ossi|lc to cstiutc i:civicul loss :uctc:s o: t|c |sis oi t|ci: i:civicul
couo:c:ts ;scc t|lc |ovc, lo: cc| loss :uctc:, wc cxli: t|c lic
tio: oi t|csc uct|ocs i: g:ctc: cctil |clow
Book Value Loss
loo| vluc losscs c: :isc i: t|c cou:sc oi :cst:uctu:i:g cuc to :til w:itc
oii o: i: t|c cou:sc oi liquictio: I|c liquictio: itscli c: |c |scc o: |:|
:utc, :cliztio: o: t|c :cliztio: oi colltc:l
l: t|c csc oi :cliztio: i: bankruptcy/composition proceedings, |isto:icl
cciult ct :c uscc io: t|c u:osc oi ci:cct cstiutio: l: o:cc: to :ccucc
t|c u:gi: oi iluctutio: :ou:c t|c vc:gc :ccovc:, :tc, it is cvis|lc to c:
io:u scguc:ttio: |, i:civicul custouc: t,c l: t|c csc oi co:o:tc cus
touc:s, ccitio:l scguc:ttio: |, i:cust:, u, |c |cliul i: o:cc: to ccou:t
io: t|ci: t,icl sscts st:uctu:c :c t|us lso t|ci: :o||lc :ccovc:, :tcs As
Loss Parameter Information
Carrier
Method of direct/
simplified estimation
Components of
Loss Parameters
Method of
indirect/detailed estimation
Book value
Realized
recovery rate
Customer Estimation using
loss data
Liquidation value
of the enterprise
at default
Calculation of liquidation value
by company valuation based
on net value of tangible assets
Bankruptcy costs Expert estimation
Markdown on
market price due
to forced sale
Expert estimation
Book value
Recovery rate
for collateral
realization
Collateral Estimation using
loss data
Value of collateral
at time of default
Estimation using loss data,
cash flow model,
realization-based expert
valuation of collateral
Liquidation period Expert estimation,
estimation using loss data
Realization costs Expert estimation,
Markdown on
market price due
to forced sale
Expert estimation,
Book value
Partial write-off
(restructuring)
Customer Estimation using
loss data
Interest loss Transaction Calculation of lost
interest
Refinancing costs
until realization
Contribution margin analysis,
financial calculations
Lost interest Contribution margin analysis,
financial calculations
Opportunity costs Contribution margin analysis,
financial calculation
Workout costs Customer/
transaction
Expert estimation,
cost and activity
accounting
Direct write-off/
easy restructuring
Expert estimation,
cost and activity accounting
Medium restructu-
ring/liquidation
Expert estimation,
Difficult restructu-
ring/liquidation
Expert estimation,
t|osc sscts w|ic| sc:vc s colltc:l io: lo:s i:ou t|i:c :tics :c isoltcc
i:ou t|c |:|:utc, csttc, t|c :ccovc:, :tc will |c :ccuccc cco:ci:gl, io:
t|c u:sccu:cc o:tio: oi t|c lo: lo: t|is :cso:, it is lso cvis|lc to iu:t|c:
ciiic:c:titc custouc:s |, t|ci: ccg:cc oi colltc:liztio: i:ou |l:cc s|cct
sscts
1!0
li ossi|lc, scguc:ts s|oulc |c ccii:cc o: t|c |sis oi sttisticl :l,scs
w|ic| cvlutc t|c cisc:iui:to:, owc: oi cc| scguc:ttio: c:itc:io: o:
t|c |sis oi vluc cist:i|utio: li uc:i:giul sttisticl :l,sis is :ot icsi|lc,
t|c scguc:ttio: c:itc:i c: |c sclcctcc o: t|c |sis oi cxc:t cccisio:s I|csc
sclcctio:s :c to |c |ustiiicc cco:ci:gl,
li |isto:icl cciult ct co :ot llow ci:cct cstiutcs o: t|c |sis oi scg
uc:ttio:, t|c :ccovc:, :tc s|oulc |c cxcluccc i:ou usc t lcst io: t|osc
cscs i: w|ic| colltc:l :cliztio: ccou:ts io: u|o: o:tio: oi t|c :ccovc:,
:tc li t|c tocow: :oc| is lso :ot suit|lc io: l:gc u:sccu:cc cxo
su:cs, it u, |c wo:t| co:sicc:i:g clculti:g t|c :ccovc:, :tc usi:g : ltc:
:tivc |usi:css vlutio: uct|oc |scc o: t|c :ct vluc oi t:gi|lc sscts
A:o:itcl, co:sc:vtivc cstiutcs oi ssct vlucs s wcll s t|c costs oi |:|
:utc, :occcci:gs :c ciscou:ts io: t|c slc oi sscts s|oulc |c |scc o: suit
|lc cocuuc:ttio:
W|c: cstiuti:g lGD io: partial write-off i: co::cctio: wit| lo:
:cst:uctu:i:g, it is cvis|lc to iiltc: out t|osc cscs i: w|ic| suc| :occcu:c
occu:s :c is utc:ill, :clcv:t li t|c vil|lc |isto:icl ct co :ot llow :cli
|lc cstiutcs, t|c suc |oo| vluc loss s i: t|c |:|:utc, :occcci:gs
s|oulc |c licc to t|c u:sccu:cc o:tio: oi t|c cxosu:c
l: t|c csc oi collateral realization, |isto:icl cciult ct :c uscc io: t|c
u:osc oi ci:cct cstiutio: Agi:, it is cvis|lc to c:io:u scguc:ttio:
|, colltc:l t,c i: o:cc: to :ccucc t|c u:gi: oi iluctutio: :ou:c t|c vc:
gc :ccovc:, :tc ;scc scctio: !!,
l: t|c csc oi c:so:l colltc:l, t|c ,uc:t oi t|c sccu:cc uou:t
ccc:cs o: t|c c:ccitwo:t|i:css oi t|c colltc:l :ovicc: t t|c tiuc oi :cl
iztio: I|is i:io:utio: is iulicit i: |isto:icl :ccovc:, :tcs l: o:cc: to cii
ic:c:titc uo:c :cciscl, i: t|is co:tcxt, it is ossi|lc to c:io:u scguc:ttio:
|scc o: t|c :ti:gs oi colltc:l :ovicc:s l: t|c csc oi gu::tccs :c c:ccit
cc:ivtivcs, t|c :cliztio: c:ioc is t|co:cticll, s|o:t, s uost co:t:cts cll
io: ,uc:t t ii:st :cqucst l: :cticc, |owcvc:, :cliztio: o: t|c |sis oi
gu::tccs souctiucs t|cs lo:gc: |ccusc gu::to:s co :ot lw,s ucct ,
uc:t o|ligtio:s iuuccitcl, uo: :cqucst lo: t|is :cso:, it u, |c :o
:itc to ciiic:c:titc |ctwcc: i:stitutio:l :c ot|c: gu::to:s o: t|c |sis oi
t|c |:|`s i:civicul cxc:ic:cc
l: t|c csc oi sccu:itics :c ositio:s i: io:cig: cu::c:cics, otc:til vluc
iluctutio:s cuc to u:|ct ccvclouc:ts o: t|c liquicit, oi t|c :cscctivc u:
|ct :c iulicitl, co:ti:cc i: t|c :ccovc:, :tcs l: o:cc: to ciiic:c:titc uo:c
120
For example, this can be done by classifying customers and products in predominantly secured and predominantly unsecured
product/customer combinations. In non-retail segments, unsecured transactions tend to be more common in the case of govern-
ments, financial service providers and large capital market-oriented companies. The companys revenues, for example, might also
serve as an alternative differentiating criterion. In the retail segment, for example, unsecured transactions are prevalent in
standardized business, in particular products such as credit cards and current account overdraft facilities. In such cases, it
is possible to estimate book value loss using the retail pooling approach.
:cciscl, i: t|is co:tcxt, it u, |c cvis|lc to co:sicc: scguc:ttio: |scc o:
t|c |isto:icl voltilit, oi sccu:itics s wcll s u:|ct liquicit,
I|c :ccovc:, :tcs io: |,sicl colltc:l iulicitl, co:ti: t|c i:civicul
couo:c:ts ;colltc:l vluc t tiuc oi cciult, :cliztio: c:ioc, :cliztio:
costs :c u:|cow: o: u:|ct :icc io: illiquic u:|cts, l: o:cc: to iu:ovc
cisc:iui:to:, owc: wit| :cg:c to t|c :ccovc:, :tc io: cc| scguc:t, it is
cvis|lc to c:io:u iu:t|c: scguc:ttio: |scc o: t|csc couo:c:ts I|c
ccii:itio: oi scguc:ts s|oulc |c :logous to t|c sclcctio: oi scguc:ttio: c:i
tc:i io: |:|:utc, :ccovc:, :tcs |scc o: sttisticl :l,scs w|c:cvc: os
si|lc li uc:i:giul sttisticl :l,sis is :ot icsi|lc, t|c scguc:ttio: c:itc:i
c: |c sclcctcc o: t|c |sis oi |ustiiicc cxc:t cccisio:s
As : ltc::tivc, it is ossi|lc to cstiutc t|c vluc oi couo:c:ts i:civic
ull,, csccill, i: t|c csc oi |,sicl colltc:l I|is is csccill, couuo:
:cticc i: t|c csc oi l:gc o||ccts ;:cl csttc, s|is, i:c:it, ctc, itl
cquiuc:t is gc:c:ll, vlutcc usi:g |usi:css c:itc:i i: suc| w, t|t t|c
colltc:l`s vluc ccc:cs o: t|c i:couc it is cxcctcc to gc:c:tc ;:csc:t
vluc oi cs| ilow, l: suc| cscs, suit|lc uct|ocs i:clucc cs| ilow uoccls,
w|ic| c: |c coulcc wit| cco:ouct:ic uoccls io: t|c u:osc oi cstiuti:g
:c:t ccvclouc:ts :c occu:c, :tcs, io: cxulc l:stcc oi cs| ilow siu
ultio:, t|c :csc:t vluc :c :o:itc u:|cow:s c: io:u t|c |sis io:
cstiutcs oi t|c colltc:l vluc t cciult, w|ic| is clcultcc |, uc:s oi
cxc:t vlutio: io: :cl csttc :c l:gc uov|lc :oc:t, ;cg s|is, l:ivtc
co:suuc: goocs suc| s ssc:gc: vc|iclcs c: |c vlutcc usi:g t|c scco:c:,
u:|ct :iccs oi goocs wit| cou:|lc c|:ctc:istics l: co:t:st, slc|ilit,
is u:cc:ti: i: t|c csc oi |,sicl colltc:l io: w|ic| liquic :c cst|lis|cc
scco:c:, u:|cts co :ot cxist, t|is s|oulc |c t|c: i:to ccou:t cco:ci:gl,
lt is t|c: :cccss:, to c|ust t|c :csulti:g :csc:t vluc co:sc:vtivcl, usi:g
:, lic|lc u:|cow:s ;cg cuc to :cglcctcc ui:tc::cc ctivitics, :c
uisccll:cous u:|ct ccvclouc:ts u to t|c tiuc oi cciult l: ccitio: to
t|c :cliztio: c:ioc, t|c scciiic :cliztio: costs ;cxc:t oi:io:s, uctio:
cc:s` couuissio:s, :c :, u:|cow:s o: t|c u:|ct :icc cuc to t|c :cliz
tio: u:|ct`s liquicit, lso ccsc:vc sccil ttc:tio: As t|csc costs gc:c:ll,
:cui: wit|i: |:ow: ::gcs, it is cvis|lc to usc cxc:t cstiutcs io: t|csc
couo:c:ts l: t|is :occss, t|c sccts covc:cc :c t|c vlutio: s|oulc |c
cou:c|c:si|lc :c clc:l, ccii:cc
Interest Loss
I|c |sis io: clculti:g i:tc:cst loss is t|c i:tc:cst ,uc:t st:cus lost cuc to
t|c cciult As :ulc, t|c g:ccc i:tc:cst :tc iulicitl, i:cluccs :cii::ci:g
costs, :occss :c ovc:|cc costs, :cuiuus io: cxcctcc :c u:cxcctcc loss,
s wcll s t|c clcultcc :oiit I|c :csc:t vluc clcultcc |, ciscou:ti:g t|c
i:tc:cst ,uc:t st:cu wit| t|c :is|i:cc tc:u st:uctu:c oi i:tc:cst :tcs :c
:csc:ts t|c :clizcc i:tc:cst loss lo: uo:c cctilcc :l,sis, it is ossi|lc to
usc co:t:i|utio: u:gi: :l,scs to cccuct t|c cost couo:c:ts w|ic| :c :o
lo:gc: i:cu::cc cuc to t|c cciult i:ou t|c g:ccc i:tc:cst :tc
l: ccitio:, it is ossi|lc to i:clucc : i:c:cscc cquit, o:tio: io: t|c
uou:t io: w|ic| :o lo: loss :ovisio:s wc:c c:ctcc o: w|ic| ws w:ittc:
oii I|is |ig|c: cquit, o:tio: :csults i:ou u:cc:ti:t, |out t|c :ccovc:ics
cu:i:g t|c :cliztio: c:ioc I|c |:|`s i:civicul cost oi cquit, c: |c uscc
io: t|is u:osc
li : i:stitutio: ccciccs to clcultc oo:tu:it, costs cuc to lost cquit,, it
c: i:clucc t|csc costs i: t|c uou:t oi :oiit lost ;itc: clculti:g t|c :is|
c|ustcc :ctu:: o: cquit,,
Workout Costs
l: o:cc: to cstiutc wo:|out costs, it is ossi|lc to |sc clcultio:s o: i:tc::l
cost :c ctivit, ccou:ti:g Dcc:ci:g o: |ow wo:|out costs :c :cco:ccc i:
cost u:it ccou:ti:g, i:civicul t::sctio:s u, |c uscc io: cstiutcs I|c
costs oi colltc:l :cliztio: c: |c ssig:cc to i:civicul t::sctio:s |scc
o: t|c t::sctio:scciiic cccictio: oi colltc:l
W|c: cost lloctio: uct|ocs :c uscc, it is iuo:t:t to c:su:c t|t t|csc
uct|ocs :c :ot licc too |:ocl, lt is :ot :cccss:, to ssig: costs to scciiic
:occss stcs I|c lloctio: oi costs i:cu::cc |, liquictio: u:it i: t|c :ctil
scguc:t to t|c cciultcc lo:s is :cso:|lc :oc| to :cltivcl, |ouogc:ous
cscs lowcvc:, ii t|c lcgl cc:tuc:t o:l, :oviccs :til suo:t io: liquic
tio: ctivitics, io: cxulc, it is :cic:|lc to usc i:tc::l t::sic: :ici:g
l: cscs w|c:c t|c |:|`s i:civicul cost :c ctivit, ccou:ti:g :occcu:cs
c::ot ccict t|c wo:|out costs i: suit|lc u::c:, cxc:t cstiutcs c: |c
uscc to clcultc wo:|out costs l: t|is co:tcxt, it is iuo:t:t to usc t|c |sic
i:io:utio: vil|lc i:ou cost :c ctivit, ccou:ti:g ;cg costs c: culo,cc
:c t|c li|c, w|c:cvc: ossi|lc
W|c: cstiuti:g wo:|out costs, it is cvis|lc to ciiic:c:titc o: t|c |sis oi
t|c i:tc:sit, oi liquictio: l: t|is co:tcxt, it is suiiicic:t to ciiic:c:titc cscs
usi:g two to t|:cc ctcgo:ics lo: cc| oi t|osc ctcgo:ics, :o||ilit, oi
occu::c:cc c: |c cctc:ui:cc o: t|c |sis oi |isto:icl cciults li t|is is :ot
ossi|lc, t|c :tc c: |c |scc o: co:sc:vtivc cxc:t cstiutcs I|c |:|
uig|t lso |c |lc to ssuuc st:c:c :cst:uctu:i:gliquictio: i:tc:sit,
io: cc:ti: custouc: :co: :ocuct t,cs
7.5 Developing an LGD Estimation Model
I|c :occcu:l uoccl io: t|c ccvclouc:t oi : lGD cstiutio: uoccl co:
sists oi t|c iollowi:g stcs
1 A:l,sis oi ct vil|ilit, :c qulit, oi i:io:utio: c::ic:s
! Dt :c:tio:
! clcctio: oi suit|lc cstiutio: uct|ocs io: i:civicul loss :uctc:s
+ ou|i:tio: oi i:civicul cstiutio: uct|ocs to c:ctc : ovc:ll uoccl
. Vlictio:
Dt vil|ilit, :c qulit, :c t|c ui: liuiti:g icto:s i: t|c sclcctio: oi
suit|lc uct|ocs io: lGD cstiutio: As :csult, it is :cccss:, to :l,zc t|c
vil|lc ct sct |cio:c u|i:g cccisio:s s to t|c t,c :c scoc oi t|c csti
utio: uct|ocs to |c iulcuc:tcc l: t|c cou:sc oi ct :c:tio:, it u,
lso |c ossi|lc to iill gs i: t|c ct sct I|c qulit, :cqui:cuc:ts io: t|c ct
sct :c t|c suc s t|osc w|ic| l, to lD cstiutcs
loss ct :l,scs :c i:cquc:tl, coulcuc:tcc |, cxc:t vlictio:s cuc to
sttisticll, i:suiiicic:t ct scts A sull ct sct is gc:c:ll, ssocitcc wit|
|ig| ccg:cc oi v:i:cc i: :csults Acco:ci:gl,, t|is loss oi :ccisio: i: t|c i:tc:
:cttio: oi :csults ccsc:vcs sccil ttc:tio: l: t|c cou:sc oi ccvclouc:t, t|c
|:| c: usc ct ool i: o:cc: to :ovicc |:occ: ct sct ;ci scctio:
.1!, l: t|c s|o:t tc:u, cstiutcc vlucs c: |c c|ustcc co:sc:vtivcl, to
couc:stc io: |ig| ccg:cc oi v:i:cc l: t|c ucciuu :c lo:g tc:u, |ow
cvc:, it is cvis|lc to gc:c:tc cou:c|c:sivc :c qulit,ssu:cc |isto:icl
ct sct I|csc ct :ovicc : iuo:t:t |sis io: iutu:c vlictio: :c
|c|tcsti:g ctivitics, s wcll s c:|li:g iutu:c c|:gcs i: cstiutio: uct|oc
olog, \o:covc:, lscl ll :c t|c c:it lD ci:cctivc :cqui:c t|c c:ctio: oi loss
|isto:ics, cvc: io: t|c lkl lou:ctio: A:oc|
1!1
W|c: sclccti:g uct|ocs, t|c |:| c: t|c t|c utc:ilit, oi cc| loss cou
o:c:t i:to ccou:t wit| :cg:c to t|c ciio:t :c :ccisio: i:volvcc i: cc|
uct|oc lscc o: |:|`s i:civicul :cqui:cuc:ts, it u, |c :o:itc to
iulcuc:t scciiic lGD cstiutio: tools io: cc:ti: custouc: :c t::sctio:
scguc:ts lo: t|is u:osc, i:civicul cou|i:tio:s oi loss :uctc:s :c
i:io:utio: c::ic:s c: |c gg:cgtcc to c:ctc |usi:css scguc:tscciiic
lGD tool usi:g v:ious cstiutio: uct|ocs I|is tool s|oulc :cilcct t|c sig:ii
ic:cc oi i:civicul loss couo:c:ts I|:oug|out t|c ccvclouc:t stgc, it is
lso iuo:t:t to |c: vlictio: :cqui:cuc:ts i: ui:c s : :cill:, co:ci
tio:
l: t|c scctio:s t|t iollow, wc :csc:t : cxulc oi |ow to iulcuc:t csti
utio: uct|ocs io: cc| oi t|c loss :uctc:s |oo| vluc loss, i:tc:cst loss,
:c wo:|out costs
Estimating Book Value Loss
(Example: Recovery Rates for Physical Collateral)
l: t|c cou:sc oi initial practical implementations t v:ious i:stitutio:s, scguc:
ttio: |s cuc:gcc s t|c |cst:cticc :oc| wit| :cg:c to iulcuc:t|il
it,, csccill, io: t|c :ccovc:, :tcs oi |,sicl colltc:l l: t|is scctio:, wc
|:icil, :csc:t scguc:ttio: :oc| |scc o: |:t -1 |clow
lt is ii:st :cccss:, to gt|c: :ccovc:, :tcs io: ll :clizcc colltc:l ovc: s
lo:g tiuc sc:ics s ossi|lc I|csc c:cc:tgcs :c lccc o: o:c xis ::gi:g
i:ou 0 to t|c |ig|cst o|sc:vcc :ccovc:, :tc l: o:cc: to ciiic:c:titc :ccov
c:, :tcs uo:c :cciscl,, it is t|c: ossi|lc to scguc:t t|cu cco:ci:g to v:
ious c:itc:i I|csc c:itc:i c: |c sclcctcc cit|c: |, sttisticl uc:s usi:g cis
c:iui:to:, owc: tcsts o: o: t|c |sis oi cxc:t cstiutcs :c co:|cctu:cc
:cltio:s|is
121
|:t -1 lxulc oi cguc:ttio: io: lstiuti:g lGD
I|c cig:u |clow s|ows : cxulc oi t|c cist:i|utio: oi |isto:icl :ccov
c:, :tcs i:ou t|c :cliztio: oi :cl csttc colltc:l |scc o: t|c t,c oi :cl
csttc
|:t -! lxulc oi kccovc:, ktcs io: Dciult |, ustouc: G:ou
lvc: t ii:st gl:cc, t|c cist:i|utio: i: t|c cxulc |ovc clc:l, :cvcls t|t
t|c scguc:ttio: c:itc:io: is suit|lc cuc to its cisc:iui:to:, owc: ttisticl
tcsts ;cg loluogo:ovui::ov Icst, DIcst, c: |c licc i: o:cc: to :l,zc
t|c cisc:iui:to:, owc: oi ossi|lc scguc:ttio: c:itc:i cvc: i: cscs w|c:c
t|ci: suit|ilit, is :ot iuuccitcl, visi|lc
lt is ossi|lc to sccii, scguc:ts cvc: iu:t|c: usi:g ccitio:l c:itc:i ;cg
liquicit, oi :cliztio: u:|cts :c liquictio: c:ioc, uc| scciiictio: cocs
:ot :cccss:il, u|c sc:sc io: cvc:, scguc:t W|c: sclccti:g c:itc:i, it is
iuo:t:t to c:su:c t|t suiiicic:tl, l:gc g:ou c: |c ssig:cc to cc| scg
uc:t At t|c suc tiuc, t|c c:itc:i s|oulc :ot ovc:l cxccssivcl, i: tc:us oi
i:io:utio: co:tc:t lo: cxulc, t|c :oc:t, t,c i: :cl csttc co:stitutcs
coulcx ct clcuc:t w|ic| co:ti:s iulicit i:io:utio: o: t|c :clcv:t :cl
iztio: u:|ct, its liquicit,, ctc Accitio:l su|civisio:s c: sc:vc to c:|:cc
t|c i:io:utio: vluc, lt|oug| t|c |solutc i:io:utio: gi: tc:cs to c:o
s t|c ii:c:css oi t|c ctcgo:iztio: i:c:cscs
l: t|c clcultio: oi |oo| vluc loss, t|c colltc:l oi : ctivc lo: is
ssig:cc to scguc:t cco:ci:g to its scciiic c|:ctc:istics I|c ssig:cc
:ccovc:, :tc is cqul to t|c :it|uctic uc: oi |isto:icl :ccovc:, :tcs io:
ll :clizcc colltc:l ssig:cc to t|c scguc:t I|c |oo| vluc loss io: t|c
sccu:cc o:tio: oi t|c lo: is t|us cqul to t|c sccu:cc |oo| vluc ui:us t|c
:ccovc:, :tc
1!!
l: t|c cou:sc oi qu:tittivc vlictio: ;ci c|tc: o,, it is :
ticul:l, :cccss:, to :cvicw t|c st:c:c ccvitio:s oi :clizcc :ccovc:, :tcs
c:iticll, l: cscs w|c:c ccvitio:s i:ou t|c :it|uctic uc: :c vc:, l:gc, t|c
uc: s|oulc |c c|ustcc co:sc:vtivcl,
:c |ig|l, :clcv:t :cticl cxulc is t|c lGDG:ci:g :occcu:c
uscc |, t|c Vc:|:c ccutsc|c: l,ot|c|c:|:|c: ;VDl, t|c Associtio: oi
Gc:u: \o:tggc l:|s,,
1!!
w|ic| co:sists oi :oxiutcl, !0 i:stitutio:s
I|c |sis io: t|is uoccl ws sulc oi souc !,.00 cciultcc lo:s ;i:cluci:g
1,-00 :csicc:til :c o00 couuc:cil co:st:uctio: lo:s, w|ic| t|c :ticit
i:g i:stitutio:s |c co:t:i|utcc to ool i: :o:,uous io:u lo: cc| ct
:cco:c, t|c cxc:ts :csclcctcc :c su:vc,cc !0 c|:ctc:istics Duc to t|c
u:|ct :csc:cc oi t|c :ticiti:g i:stitutio:s, t|c sulc c: |c ssuucc
to co:ti: :c:csc:ttivc loss ct : t|c |sis oi t|c !0 c|:ctc:istics
sclcctcc, t|c ccvcloc:s c::icc out suit|lc sttisticl :l,scs i: o:cc: to icc:
tii, !! cisc:iui:ti:g scguc:ts wit| :cg:c to :ccovc:, :tcs cguc:ttio: is
|scc o: t|c :oc:t, t,c, w|ic| is cu::c:tl, civiccc i:to - scciiic t,cs,
ciio:ts :c u:cc:w, to su|civicc t|is ctcgo:, iu:t|c: i:to 1- t,cs Accitio:l
scguc:ttio: c:itc:i i:clucc t|c loctio: :c c|:ctc:istics oi t|c :cliztio:
u:|ct, io: cxulc I|is |isto:icl :ccovc:, :tc is t|c: licc to t|c u:|ct
vluc i: t|c csc oi liquictio: lo: t|is u:osc, t|c cu::c:t u:|ct vluc
;cxc:t vlutio:, is cxt:oltcc io: t|c tiuc oi liquictio: usi:g co:sc:v
tivc u:|ct vluc io:ccst :c :, lic|lc u:|cow:s
l: :ot|c: :cticl iulcuc:ttio: io: o||cct ii::ci:g t::sctio:s, scg
uc:ttio: is |scc o: i: sullc: sulc cuc to t|c :cltivc i:i:cquc:c, oi
cciults l: t|is csc, o||cct ctcgo:ics ;i:c:it, ctc, wc:c su|civiccc i:to i:ci
vicul o||cct t,cs ;i: t|c csc oi i:c:it lo:g|ul i:cig|t, lo:g|ul ssc:
gc:, ctc, Duc to t|c :cltivcl, sull ct sct, cxc:ts wc:c cllcc i: to vlictc
t|c scguc:t ssig:uc:ts Accitio:l scguc:ttio: c:itc:i i:cluccc t|c liquic
122
For the unsecured portion, the bankruptcy recovery rate can be estimated using a specific segmentation approach (based on
individual criteria such as the legal form of business organization, industry, total assets, and the like) analogous to the
one described for collateral recovery rates.
123
Various documents on the implementation of this model are available at http://www.hypverband.de/hypverband/attachments/
aktivl
,
gd_gdw.pdf (in German), or at http://www.pfandbrief.org (menu path: lending/mortgages/LGD-Grading).
it, oi t|c :cliztio: u:|ct :c t|c u:|ct|ilit, oi t|c o||cct A ii:c: ciiic:
c:titio: woulc :ot |vc |cc: |ustiii|lc cuc to t|c sizc oi t|c ct sct uscc
Duc to t|c |ig| v:i:cc oi :ccovc:, :tcs wit|i: scguc:ts, t|c :csults |vc
to |c i:tc::ctcc co:sc:vtivcl, I|c :ccovc:, :tcs :c licc to t|c vluc
t :cliztio: l: t|is :occss, t|c vluc t cciult, w|ic| is clcultcc usi:g
cs| ilow uoccl, is c|ustcc co:sc:vtivcl, cco:ci:g to t|c cxcctcc vc:gc
liquictio: c:ioc io: t|c scguc:t
Estimating Interest Loss
l: :cticc, i:tc:cst loss is cstiutcc o: t|c |sis oi t|c i:tc:cst ,uc:ts lost
cuc to t|c cciult l: t|is :occss, t|c g:ccc i:tc:cst io: t|c :csicul tc:u is
ciscou:tcc, io: cxulc usi:g t|c cu::c:t :is|i:cc tc:u st:uctu:c oi i:tc:cst
:tcs I|c:cio:c, t|c :csulti:g :csc:t vluc iulicitl, co:ti:s otc:til :cii
::ci:g costs s wcll s t|c s:cc couo:c:ts :occss :c ovc:|cc costs, :is|
:cuiuus, :c :oiit I|c:c :c lso :cticl :oc|cs w|ic| ccou:t io: t|c
i:c:cscc cquit, o:tio: :cqui:cc to :cii::cc t|c uou:t :ot w:ittc: oii ovc:
t|c liquictio: c:ioc I|c |:|`s i:civicul cost oi cquit, c: |c uscc io: t|is
u:osc I|c :cticl cxulcs iulcuc:tcc to ctc |vc :ot t|c: t|c oo:
tu:it, costs oi lost cquit, i:to ccou:t
Estimating Workout Costs
I|c cstiutio: uct|oc sclcctcc io: clculti:g wo:|out costs ccc:cs o: t|c
o:g:iztio:l st:uctu:c :c t|c lcvcl oi cctil uscc i: cost u:it :c cost cc:tc:
ccou:ti:g I|c t,c :c scoc oi t|c cstiutio: uct|oc s|oulc :cilcct t|c sig
:iiic:cc oi wo:|out costs io: t|c scciiic custouc: o: t::sctio: t,c usi:g
t|c vil|lc ccou:ti:g i:io:utio: li |:| |s sc:tc :cst:uctu:i:g
:c liquictio: u:it io: scciiic |usi:css scguc:t, io: cxulc, it is :cltivcl,
cs, to lloctc t|c costs i:cu::cc |, t|t cc:tuc:t
l: o:c :cticl iulcuc:ttio: oi uoccl io: o||cct ii::ci:g t::sctio:s,
cxc:ts cstiutcc t|c tiuc occuicc |, t,icl cs, :c ciiiicult :cst:uctu:i:g
liquictio: cscs io: : culo,cc wit| t|c :o:itc quliiictio:s lscc o:
ccou:ti:g ct, costs c: culo,cc wc:c lloctcc to t|c tiuc occuicc, u|
i:g it ossi|lc to cctc:ui:c t|c cost :tcs io: cs, :c ciiiicult liquictio: cscs
listo:icl :tcs io: cs, :c ciiiicult liquictio: cscs wc:c uscc to wcig|t t|csc
cost :tcs wit| t|ci: :cscctivc :o||ilitics oi occu::c:cc
Combining Book Value Loss, Interest Loss and Workout Costs
to Yield LGD
l: o:cc: to clcultc lGD, t|c i:civicul loss couo:c:t cstiutcs |vc to |c
uc:gcc l: t|is co:tcxt, it is iuo:t:t to :otc t|t t|c colltc:l :ccovc:ics :c
cx:csscc s c:cc:tgc oi t|c sccu:cc o:tio: :c |:|:utc, :occccs s
c:cc:tgc oi t|c u:sccu:cc o:tio: oi t|c lo:, :c t|t wo:|out costs :c
uo:c scciiic to cscs t|: voluucs l: o:cc: to clcultc lGD, t|c i:civicul
couo:c:ts |vc to |c uc:gcc cco:ci:gl, io: t|c c:ccit icilit, i: qucstio: l:
t|is co:tcxt, cstiutcc :o||ilitics oi occu::c:cc ii:st |vc to |c ssig:cc
to t|c ostcciult ccvclouc:t scc::ios :csclcctcc io: t|c scciiic icilit,
t,c ;ci scctio: +!, I|c: it is :cccss:, to cc u t|c t|:cc cstiutcc loss
couo:c:ts ;|oo| vluc loss, i:tc:cst loss, :c wo:|out costs, lt is :ot :cccs
s:, |ut u,, oi cou:sc, |c usciul to iulcuc:t co|csivc lGD cstiutio:
tool io: t|is u:osc
8 Estimating Exposure at Default (EAD)
lAD is t|c o:l, :uctc: w|ic| t|c |:| c: i:iluc:cc i: cv:cc |, :ccc
ii: :g liuits o: c:ccit :ovls io: cc:ti: lDlGD cou|i:tio:s l: ctivc
g:ccuc:ts, t|c |:| c: lso iuosc liuits |, g:cci:g o: ccitio:l covc
::ts I|c lcvcl oi lAD itscli is cctc:ui:cc |, t|c t::sctio: t,c :c cus
touc: t,c
8.1 Transaction Types
o:cc::i:g t::sctio: t,cs, wc c: u|c gc:c:l cisti:ctio: |ctwcc: |l
:cc s|cct itcus :c oii|l:ccs|cct t::sctio:s l: t|c csc oi |l:cc s|cct
itcus, lAD is cqul to t|c cu::c:t |oo| vluc oi t|c lo: l: t|c csc oi oii
|l:ccs|cct t::sctio:s, : cstiutcc c:ccit co:vc:sio: icto: ;l, is uscc
to co:vc:t g::tcc :c u:c:w: c:ccit li:cs i:to lAD vlucs l: t|c csc oi
cciult, lAD is lw,s cqul to t|c cu::c:t |oo| vluc l: gc:c:l, oii|l:cc
s|cct t::sctio:s c: :o lo:gc: |c utilizcc |, t|c |o::owc: cuc to t|c tc:ui
:tio: oi t|c c:ccit li:c i: t|c csc oi cciult I|c:cio:c, lAD cstiutcs usi:g
ls ttcut to cstiutc t|c cxcctcc utiliztio: oi t|c oii|l:ccs|cct t::s
ctio: g::tcc t t|c tiuc oi cstiutio: I|c iollowi:g :ocuct t,cs :c uo:g
t|c :clcv:t oii|l:ccs|cct t::sctio:s
li:cs oi c:ccit ;:cvolvi:g c:ccit io: co:o:tc custouc:s, cu::c:t ccou:t
ovc:c:it icilitics io: :ctil custouc:s,
lo: couuituc:ts ;:ot o: o:l, :tl, c:w:,
lcttc:s oi c:ccit
Gu::tcc c:ccit ;gu::tccs io: w:::t, o|ligtio:s, cciult gu::tccs,
:c:tl ,uc:t gu::tccs,
D:cc: t|c c:it lD ci:cctivc, io:cig: cxc|:gc, i:tc:cst :tc, c:ccit :c
couuocit, cc:ivtivcs :c cxcut i:ou |:|s` i:tc::l l cstiutio:
1!+
l:
t|csc cscs, t|c :clccuc:t costs lus :cuiuu io: otc:til iutu:c cxosu:c
:c c:tc:cc cco:ci:g to t|c i:civicul :ocucts :c utu:it, |:cs
lt is :ot :cccss:, to cstiutc lAD i: t|c csc oi u:c:w: c:ccit couuit
uc:ts w|ic| c: |c c:ccllcc iuuccitcl, ii t|c |o::owc:`s c:ccit st:ci:g
cctc:io:tcs l: suc| cscs, t|c |:| |s to c:su:c t|t it c: cctcct cctc:io:
tio: i: t|c |o::owc:`s c:ccit st:ci:g i: tiuc :c :ccucc t|c li:c oi c:ccit
cco:ci:gl,
124
I|c lcvcl oi utiliztio: io: oii|l:ccs|cct t::sctio:s c: ::gc |ctwcc:
0 :c 100 t t|c tiuc oi cciult I|c c|:t |clow illust:tcs t|is oi:t
|:t -! ||cctivc i: t|c lcultio: oi lAD io: l:til Dtiliztio: oi :ccit li:cs
l: t|c csc oi gu::tccs io: w:::t, o|ligtio:s, t|c gu::tcc c: o:l, |c
utilizcc |, t|c t|i:c :t, to w|ic| t|c w:::t, is g::tcc l: suc| csc, t|c
|:| |s cliu gi:st t|c |o::owc: li t|c |o::owc: cciults cu:i:g t|c
c:ioc io: w|ic| t|c |:| g::tcc t|c gu::tcc, t|c utiliztio: oi t|is gu::
tcc woulc i:c:csc lAD I|c utiliztio: itscli cocs :ot ccc:c o: t|c |o::ow
c:`s c:ccitwo:t|i:css
l: t|c |:|`s i:tc::l t:ctuc:t oi cxcctcc loss, t|c :c,uc:t st:uctu:c oi
oii|l:ccs|cct t::sctio:s is csccill, i:tc:csti:g ovc: lo:gc: o|sc:vtio:
|o:izo:, s t|c |o::owc:`s :o||ilit, oi su:vivl ccc:cscs io: lo:gc: c:ccit
tc:us :c t|c loss cxosu:c i:volvcc i: |ullct lo:s i:c:cscs
8.2 Customer Types
I|c ciiic:c:titio: oi custouc: t,cs is :clcv:t wit| :cg:c to v:,i:g |c|vio:
i: c:ccit li:c utiliztio: tucics o: t|c lAD oi |o::owc:s o: t|c citl u:|ct
:c ot|c: l:gcsclc |o::owc:s |vc s|ow: t|t li:cs oi c:ccit :c oitc: :ot
coulctcl, utilizcc t t|c tiuc oi cciult \o:covc:, it |s |cc: o|sc:vcc t|t
t|c lAD io: |o::owc:s wit| w|ou t|c |:| |s g:ccc o: covc::ts tc:cs to
ccc:csc s t|c |o::owc:`s c:ccitwo:t|i:css cctc:io:tcs, :c t|t l:gc
:uu|c: oi ossi|lc w,s to :isc cc|t citl lso tc:cs to lowc: lAD l: co:
t:st, :ctil custouc:s s wcll s sull :c ucciuusizcc c:tc::iscs :c uo:c
li|cl, s |o::owc:s to ovc:c:w :ovcc li:cs oi c:ccit lt is :t|c: u:usul to
g:cc o: covc::ts i: t|csc custouc: scguc:ts, :c t|c ossi|lc w,s oi :isi:g
cc|t citl :c lso uo:c liuitcc t|: i: t|c csc oi l:gc cou:ics I|c t|lc
|clow c: sc:vc s |sis io: ciiic:c:titi:g i:civicul custouc: g:ous l:
souc cscs, it u, lso |c cvis|lc to gg:cgtc i:civicul custouc: t,cs
|:t -+ vc:vicw oi ustouc: I,cs
8.3 EAD Estimation Methods
As i: t|c csc oi lGD cstiutio:, t|c i:itil iulcuc:ttio:s oi lAD cstiutio:
uoccls |vc :iu:il, uscc t|c scguc:ttio: :oc| ls :c cstiutcc
o: t|c |sis oi |isto:icl loss ct io: cc:ti: cou|i:tio:s oi t::sctio:s
:c custouc:s ;:c ossi|l, ot|c: scguc:ttio: c:itc:i suc| s t|c c:ccit tc:u
su:vivcc, ctc, I|c c|:t |clow illust:tcs t|is oi:t
|:t -. lxulc oi cguc:ttio: i: l lstiutio:
lt is ii:st :cccss:, to collcct ct o: cciultcc li:cs oi c:ccit ovc: s lo:g
tiuc sc:ics s ossi|lc l: t|is :occss, it is iuo:t:t to c:su:c t|t lo:s w|ic|
ltc: :ccovc:cc i:ou cciult :c lso i:cluccc I|c c:cc:tgc c:w: t t|c
tiuc oi cciult is cctc:ui:cc io: cc| oi t|csc c:ccit icilitics I|csc c:cc:
tgcs :c lccc o: o:c xis ::gi:g i:ou 0 to t|c |ig|cst o|sc:vcc utiliz
tio: l: o:cc: ciiic:c:titc ls uo:c :cciscl,, it is ossi|lc to scguc:t t|cu
cco:ci:g to v:ious c:itc:i I|csc c:itc:i c: |c sclcctcc o: t|c |sis oi cit|c:
sttisticl :l,scs o: t|co:cticl co:sicc:tio:s As : cxulc, t|c cig:u
|clow s|ows t|c cist:i|utio: oi |isto:icl utiliztio: :tcs t cciult usi:g t|c
custouc: t,c s t|c scguc:ttio: c:itc:io:
|:t -o lxulc oi Dtiliztio: ktcs t Dciult |, ustouc: G:ou
lvc: t ii:st gl:cc, t|c sulc cist:i|utio: |ovc clc:l, s|ows t|t t|c c:i
tc:io: is suit|lc io: scguc:ttio: ;ci c|:t -! i: co::cctio: wit| :ccovc:,
:tcs io: lGD cstiutcs, ttisticl tcsts c: |c uscc to c:io:u uo:c :ccisc
c|cc|s oi t|c scguc:ttio: c:itc:i`s cisc:iui:to:, owc: wit| :cg:c to t|c
lcvcl oi utiliztio: t cciult lt is ossi|lc to sccii, scguc:ts cvc: iu:t|c: usi:g
ccitio:l c:itc:i ;cg oii|l:ccs|cct t::sctio:s, lowcvc:, t|is scciiic
tio: cocs :ot :cccss:il, u|c sc:sc io: cvc:, scguc:t lt is lso :cccss:, to
c:su:c t|t t|c :uu|c: oi cciultcc lo:s ssig:cc to cc| scguc:t is suiii
cic:tl, l:gc Dt ools c: lso sc:vc to c::ic| t|c |:|`s i:|ousc cciult ct
;ci scctio: .1!,
l: t|c clcultio: oi ls, cc| ctivc c:ccit icilit, is ssig:cc to scguc:t
cco:ci:g to its scciiic c|:ctc:istics I|c ssig:cc l vluc is cqul to t|c
:it|uctic uc: oi t|c c:ccit li:c utiliztio: c:cc:tgcs io: ll cciultcc c:ccit
icilitics ssig:cc to t|c scguc:t I|c c:it lD ci:cctivc lso clls io: t|c usc oi
ls w|ic| t|c t|c ciiccts oi t|c |usi:css c,clc i:to ccou:t
l: t|c cou:sc oi qu:tittivc vlictio: ;ci c|tc: o,, it is :cccss:, to
c|cc| t|c st:c:c ccvitio:s oi :clizcc utiliztio: :tcs l: cscs w|c:c ccvi
tio:s i:ou t|c :it|uctic uc: :c vc:, l:gc, t|c uc: ;s t|c scguc:t l,
s|oulc |c c|ustcc co:sc:vtivcl, l: cscs w|c:c lD :c t|c l vluc cx|i|it
st:o:g ositivc ccc:cc:cc o: cc| ot|c:, co:sc:vtivc c|ustuc:ts s|oulc lso
|c ucc
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Rating Models & Guidelines

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Guidelines on Credit Risk Management

These guidelines were prepared by the Oesterreichische Nationalbank (OeNB)

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SCH, Uses and misuses of measures for credit rating accuracy.

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Rating Models &amp; Guidelines

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Guidelines on Credit Risk Management

These guidelines were prepared by the Oesterreichische Nationalbank (OeNB)

Duc to t|c s|o:ttc:u :tu:c oi t|c lo:s ;s uc:tio:cc |ovc,, it is :ot

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Rating Models & Guidelines

Rating Models & Guidelines