A banking portfolio risk exposure: a case study

Manuela Pulina*, Gary Norman Evans°

* Corresponding author. Ph.D Southampton University (UK). Research Fellow at University of Sassari,
(DEIR) and CRENoS (Sassari University); Via Torre Tonda, 34, 07100 Sassari, Italy Tel. +39 079
2017342 Fax. +39 079 2017312; mpulina@uniss.it

° Ph.D Cardiff University (UK), Bank Manager Tel. +39 079 221827Fax. +39 079 221827
Gary.Evans@libero.it

Abstract: This paper assesses the factors that influence the risk exposure. The cross

sectional data are from a recent portfolio for bankcards issued throughout Italy. A

multinomial logit framework estimates the probability to incur in one of eleven flagged

risk categories depending on a set of socio-economic and bank specific control

variables. The dependent variable is constructed to estimate the operational, credit and

business risk (defined as loss of profitability). The results provide a microeconomic

perspective on the factors that are responsible for risk. Women, middle-aged people,

residents in the Centre of Italy are more likely to be either victims or fraudsters.

Customers who are resident in the Centre and North West of the country, those who

own a revolving card and have had a converted or forced card are more likely to find

difficulties in paying off their debt. Finally, females, people aged more than 65 years

old, clients who are resident in the North East, those who own a gold card, have had a

forced card and belong to the II circuit are more likely either to revoke or not to

immediately activate their credit card, representing a loss in profitability for the

business.

Keywords: banking, credit card, risk exposure, multinomial logit.

JEL Codes: C35; D12 ; G21; G32.

Electronic copy available at: http://ssrn.com/abstract=1927910

1. Introduction
The definition of finance risk is very broad and embodies numerous risk categories.

However, for the banking system, loans are the largest source of credit risk that can be

defined as the risk that a borrower, or counterparty, may default on its obligations in

accordance with agreed terms.

The objective of credit risk management is to adopt all policies and procedure that can

maximise banking risk-adjusted rate of return by managing, monitoring and controlling the

exposure to risk within adequate parameters (Dedu and Nechif 2010). To this aim, Basel II

has issued a document with more precise directions on how to manage and account for credit

risk. Besides, the bank system should also integrate credit risk and other risk types (Basel II

1999).

Banking risk exposure is particularly relevant during economic turmoil. During the

second half of 2007, the sub-prime crisis extended to many other sectors of the financial

system including the credit card market. In the first quarter of 2009, the United States

experienced a 38% contraction in card issuing with respect to same period in the previous

year. The credit line also dropped by 3% reaching an average of approximately 4,600 dollars

per card. By June 2009, the charge-off rate, that represents the quota of loans that the issuer

supposes will not paid off, increased to 3.7 percent points (+9.7%), with respect to the

previous time span. The delinquency rate, that measures the proportion of account balances

for which a monthly payment is more than 30 days late as a percent of total balances,

increased to 1% (+6.5%) in June 2009, with respect to the same previous time span (Assofin-

Crif-Eurisko 2009).

From an economic perspective, credit cards can be regarded as a strategic sector for

economic development. Despite the 2001 Lisbon Accord on the displacement of cash,

Electronic copy available at: http://ssrn.com/abstract=1927910

European countries are still cash-centric. As Jones (2008) points out, cash is still 85% of the

European Union estimated 460 billion annual payment transactions, while credit cards

account for between 5% and 6%. The annual cost of cash has been estimated between 0.4%

and 0.6% of European Gross Domestic Product (GDP). Cash is regarded as security risks and

an expensive instrument for the banking system. However, credit cards use varies

significantly from country to country and consumers themselves have also a different

perspective on cash. Youngsters for example perceive cash as an old fashioned payment

instrument and are more likely to use more complex payment mechanisms.

The empirical analysis carried out in the present study has the objective to analyse credit

card risk exposure by typology of credit card. The case study is the Italian credit card bank

market. A multinomial logit model is estimated, where the probability that a given credit card

suffers of a specific type of risk, that is operational risk (e.g. risk of fraud), credit risk (e.g

default, card suspension) and business risk, defined in terms of a lower number of potential

transactions, is evaluated. The dependent variable is regressed on a set of socio-economic

and banking specific control variables. The empirical results provide useful indicators on the

factors that influence risk based on the available sample. Hence, this framework offers not

only a microeconomic perspective to analyse consumers’ behaviour but importantly an

approach to help bank managers in risk prevention knowing which factors may lead to riskier

events.

The paper is organised as follows. In the next section, a literature review on credit cards

risk is provided. In the third section, the methodology employed is highlighted. In the fourth

section, main empirical results are provided. Conclusive remarks are given in the last section.

3
2. Credit card risk exposure: a literature review
Credit card risk exposure is normally assessed during the application phase. Most of

scoring models are based on relatively sophisticated techniques (e.g. linear-logistic

regressions, classification trees, naïve Bayes, neural networks, self-organising maps, survival

analysis), that help institutions and organisations decide whether to issue credit to consumers

who apply for it (Desai et al. 1996; Greene 1998; Thomas 2000; Crook and Banasik 2004;

Bellotti and Crook 2009; Abdu 2009). Nevertheless, the application phase credit scoring is

based on historical and socio-demographic information gathered in reporting agency files.

Some well known agencies are: Equifax, Experian, Trans Union, Crif. Hence, these models

lack of current economic information that may give a different perception on a potential

customer. Avery et al. (2004), through an econometric analysis, show that economic and

personal downturns (measured in terms of actual and lagged unemployment rate and personal

status) are significant determinants that influence customers’ ex-post payment performance

even after accounting for individuals’ ex-ante credit quality. Hence, there is empirical ground

for application scoring to be tied to an in-depth evaluation of existing credit card portfolio.

Credit-bureau scoring (or behaviour scoring, see Paleologo et al., 2010) can help in

assessing existing consumer’s behavioural patterns that help the management process as well

as the implementation of market segmentation policies. However, studies on this topic are

limited. Meadows and Dibb (1998) point out that one of the limitations in financial research

relates to the lack of customers data availability.

Collection scoring is a further phase through which existing customers are divided into

groups according to their insolvency level: early, middle (from 30 to 60 days), late (more

than 60 days of insolvency) and recovery when the debt is extinguished (see for example

Paleologo et al., 2010). Also in this case, data on insolvency are not ready available to

scholars.

4
 An important type of credit card risk relates to fraud. Credit card fraud is in continuous

evolution and is subject to technological enhancement. Ever more advanced and real-time

fraud techniques enable fraudsters to illicitly obtain billions of euros from companies,

merchants and consumers each year. However, probably due the lack of statistical

information on fraud, few empirical investigations are available in this field. MasterCard for

example is the only international circuit that provides statistical information on credit card

fraud. Most of the current studies make use of statistical techniques employed in the credit

scoring phase. These techniques are aimed at discriminating if a new credit card transaction

belongs either to the genuine set or to the fraudulent set (Bolton and Hand, 2002; Thomas et

al. 2005; Quah and Sriganesh, 2008; Edge and Sampaio, 2009).

As an innovative behaviour fraud scoring analysis, Hartmann-Wendels, et al. (2009)

make use of a sample from an e-credit card portfolio, supplied by a German internet-only

bank, to assess what factors affect fraud. The main findings are that fraud risk is highly

influenced by determinants such as gender, civil status, age, occupation and urbanisation.

The authors report that nationality is a key factor as foreign customers are 22.25 times more

likely to commit when compared with German nationals.

The present paper aims at expanding this strand of research, providing new evidence on

the main factors affecting banking risk exposure within the Italian market, through the

analysis of an extensive credit card data set at a microeconomics level.

3. The case study

Payment cards are well-spread within developed countries. In 2007, the most important

markets were the USA and Canada where the annual card expenditure represented

approximately 25% of the GDP. Worldwide, each country has experienced a different

payment card development. Western and Northern Europe, for example, are characterised by

5
an annual card expenditure of 15% of GDP, whereas Japan reached approximately 7% by

2006. Within European countries (Table 1), in 2007, the biggest payment card market was

the UK (21.3% of total EU) with a distribution of 2.4 cards per capita, although less than half

this is than of the USA, at 5.3 per capita. Moreover, the UK experienced an outstanding

annual credit card expenditure of over 27.1% of GDP (Table 2).

Amongst the Western EU countries, Italy makes an interesting case study. From Table 1,

it emerges that Italy had a quota of 11.6% of all the debit and credit cards circulating in the

EU and had the highest average transaction value of 97 euros. In 2007, the number of point-

of-sale (POS) per one thousand inhabitants was 20, slightly higher than that in the UK (17)

and the USA (17), though significantly lower than in Spain (30). Nevertheless, the number of

Automatic Teller Machines (ATM) per one thousand inhabitants was relatively low (0.81) if

compared to that of other European countries (Spain and UK). The annual payment card

expenditure over GDP (AEX) was 8.4%, half that of France and almost one third of that of

the UK. Hence, Italy can be still regarded as a developing market.

As Banca d’Italia (2009) reports, in 2008, Italy had relatively low level of households

debt as a quota of disposable income (57%), that is almost half than EU average (93%) and

well below the highest level reached by the UK (161%). To a certain extent, these differences

are also due to the fact that Italians mostly tend to use cash in their transactions while

payment card transactions are yet no so much diffuse (see Table 2, AEX). However, in recent

years, the economic recession has negatively influenced the Italian credit card market. As

Assofin-Crif-Eurisko (2009) reports, in 2009, the insolvency rate (defined as the ratio

between the number of cards that are characterised by at least 6 months past due and the total

number of cards) in Italy, after years of stability, increased by 2.6% with respect to the

previous year.

6
 Notwithstanding that economic sectors are differently affected by risk exposure, during

the 2008 economic crisis, both the financial and environmental sectors experienced the

highest level of fraud (Kroll, 2010). According to the Nilson Report (2010), in 2009 fraud

losses reached 6.89 billion US$, up 7.0% on the previous year. Fraud worldwide

approximately equalled 0.05% of total volume of purchase and cash. At current growth rates,

Nilson Report estimates that by 2015 fraud will be a 10 billion US$ annual criminal activity.

The Association for Payment Clearing Services (APACS, 2009) shows that at a worldwide

level Italy is one of the top five countries to have seen an increase in the use of fraudulent

UK credit cards. Fraud on UK-issued cards being used in Italy has increased by 72.9% since

2005, to £8.3 million in 2008.

4. Empirical investigation

4.1 Data description

Cards are divided into two main categories, debit and credit. Debit cards access available

funds (prepaid and current account), whereas credit cards access a credit line supplied by the

bank/financial institution. DataBank (2009) reports that in 2008, credit cards in Italy

represented approximately 45% of the total card payment system.

The quantitative model developed in this paper assesses banking risk exposure making

use of cross-section customers’ data for only credit cards only, as debit cards present a low

risk for the bank. A credit card can be defined as a payment instrument that may be employed

to purchase goods and services and, where allowed by the issuer, to borrow money on credit

for an extended period of time. Mass market credit cards, sometimes referred to as “classic

cards”, are well-spread worldwide and have standard characteristics; relatively limited

availability to spend, POS and ATM functionality and low or no annual fees. Gold credit

cards are generally held by customers that are more likely to have higher incomes and a

7
higher spending propensity. This typology of card is in fact characterised by higher joining

and annual fees, higher spending limits and daily cash withdrawal limits since they often

provide extra services such as travel insurance, roadside assistance, hotel and car-rental

advantages, air travelling executive privileges, world wide support in the event of loss or

theft of the card, etc. The gold card can be thought of as a more sophisticated classic where

the additional services are mandated by the international circuits. A revolving card is

different to the classic card, as it allows the customer to spread the repayment over a series of

billing cycles, usually for a fee or interest charges. The owner of the revolving card therefore

has the need to borrow money to control the way the debt is repaid.

The empirical model that follows is tested using data collected from bank card account

archives for an Italian based card issuer. The cards were issued on two credit card that are

global brands. Approximately, 320 thousands card positions are considered. It is important to

note that this paper employs data on actual positions and hence one can derive a static

analysis on banking risk exposure. Classic and gold cards, issued to clients that hold a current

account with the issuer, represent 60.1% and 3.4%, respectively, of the positions. The

revolving cards, 36.5% of the positions, were issued after an application credit scoring

procedure applied by the bank. In this circumstance, it is possible that the use of ex-post

data, only with selected individuals, leads to biased estimates of the probability to acquire a

given payment instrument. This issue is not uncommon in the literature. Hartmann-Wendels

et al. (2009), for example, make use of a sample of approximately 200 thousand successful

applicants to analyse e-banking fraud. Hence, even factors that do not explicitly enter the

acceptance scoring process, but are at the same time correlated with the variables in the risk

equation may cause biased predictions. Nevertheless, the findings emerging from actual data

on successful applications can shed light on understanding potential risky consumers’

behaviour in credit markets. Besides, the outcomes can also give important information to

8
managers who have to control and minimise for future card risk on existing credit and

portfolios.

4.2 The multinomial model

The aim of the empirical analysis is to estimate the probability that a given type of credit

card experiences a risk, that is operational risk (e.g. risk of fraud), credit risk (e.g default,

card suspension) and business risk, defined in terms of a lower number of transactions that

translates into a loss of potential profit.

This framework is made operational by using a particular distribution for the

disturbances, that is a logit model within a multinomial choice structure (Greene, 2003).

Formally, for each banking customer i (i=1,…,I), a vector of dependent variables is observed

Yi,j = (Yi,1, …, Yi,11). Specifically, if customer i is exposed to a given risk typology, then Yi,j

takes the value one up to eleven. As it is a multinomial twelve-choice model, the probability

of occurrence of each of the possible events is normalised with respect to the most occurring

frequency, in this case “not at-risk” credit cards. Summary statistics are reported in Table 3.

Category zero is the not at-risk category that represents 65.98% of total sample. Categories 1

(fraud= F), 2 (stolen = ST), 3 (lost = LS), 4 (lost during postage = LSP) and 5 (suspicious =

SUS) represent cards in fraud or at-a-risk of fraud. Categories 6 (suspension=SU), 7 (revoked

= RV) and 8 (revoked and not given back = RVNB) relate to customers that cannot, either

temporarily or systematically, pay off their debt. Categories 9 (immediate renounce = IR), 10

(renounced at expiry date = RD) and 11 (waiting for activation = WA) represent a risk for the

business in terms of a lower number of transactions that translates into a loss of potential

profit. Appendix A provides more detailed definitions for each category.

Because coefficients change from one risk exposure to another, probabilities (P) change

leading to a new index (Î); in analytical terms:

9
Iˆ2i = b0 + b1 X 2i (1)
Iˆ3i = b0 + b1 X 3i (2)
I2i
e
P2i = (3)
1 + e I 2 i + e I3i
e I 3i
P3i = (4)
1 + e I 2 i + e I 3i
P1i = 1 − P2i − P3i (5)

where b0 e b1 are the estimated coefficients; Xi is given by a set of socio-economic (i.e.

gender, age, location, credit line) and banking specific control variables (i.e. credit card type,

conversion, forced card, circuit type, ownership) (see Appendix A for detailed definitions).

Table 4 provides a statistical description of the dummy variables employed in the empirical

investigation. The Pearson χ2 statistics tests for the null hypothesis that the distribution of

cards at-risk does not differ across the categories of the variable. The null hypothesis is

rejected in all cases. Finally, e is the logistic functional form that allows one to ensure that

the estimated choice probabilities lie between zero and one.

In the empirical literature, odds ratio are commonly reported (e.g. Hartmann-Wendels et

al, 2009). The odds ratio for a given group is given by the following expression:

Odds ratio = exp (b) (6)

For continuous variables an odds ratio greater than one, associated with positive

estimated parameters, indicate that higher values of the explanatory variable increase the

predicted probability of a given category compared to the reference category. Coefficients

less than one indicate the opposite.

5. Empirical findings
The main findings from the multinomial logit regression are reported in Table 5. The

overall statistics indicate a well-specified model: the likelihood ratio test (LR(198)) shows

that the coefficients of the explanatory variables are jointly statistically significant; this

10
finding is confirmed by both the LR and Wald test, though the former is more robust for

large sample size (Table 6).

Considering the first explanatory variable gen (gender), women are more likely to incur

in the risk of a fraud (either as the victim or as the fraudsters). Specifically, they are 70%

more likely to have their credit card stolen when the reference category “credit cards not at-

risk” is considered. Women also tend to wait longer before activating their credit card;

however, they are less likely to experience suspension or revokation of their credit card.

Customers who are aged between 36-55 are more likely either to experience or carry out

a fraud. Notably, all age categories can be subjected to a fraud. As a further outcome, the

business risk, expressed in terms of lower number of transactions, is more likely to occur for

older customers aged 66 years old and beyond.

Location is also an important factor in explaining banking risk exposure. Customers who

are resident in the Centre of Italy are overall the riskiest group, both in terms of actual fraud

(F=1), risk of fraud (Lost=LS=3) and suspicious fraud (SUS=8), though the latter the

coefficient is not statistically significant. People who are resident in the North East of the

country are 2.4 times more likely to have their credit card stolen, whereas the risk of loosing

the card during postage is more likely to occur in the North West of Italy. Customers who

experience more difficulties in paying off their debts and therefore their card revoked are

concentrated in North West (see column RV=6) and the Centre; the latter customers do tend

not to give back the plastic to the bank (RVNB=7). The highest risk for the business in terms

of a decreasing number of transactions occur in the North West (immediate renounced,

IR=9), in the North East (renounced at expire date, RD=10) and in the Islands (waiting for

activation, WA=11).

Customers who own a golden card represent a higher operational risk (F, ST, LS) and

loss of potential business (WA), as they tend to wait for a longer span of time to activate their

11
card. Clients who have a revolving card show a higher risk of default (suspension = SU=5,

and revoked RV=6), moreover they more tend to renounce to their card immediately (IR=9).

As an additional outcome, a card that has been subject to a reissue and, under a new

contract, is characterised by a product with similar commercial features denotes a higher

credit risk, both of suspension (SU=5) and revocation without the plastic be returned to the

bank (RVNB=7). The relevant coefficients are statistically significant the 1% level.

Customers within the I circuit show higher risk exposure, that is risk of fraud, default in

paying off their debt and lower number of transactions for immediate renounce or renounce

to expire date. However, clients within the II circuit are 4.8 more likely to wait longer for

activate their card (WA=11).

Secondary owners are more likely to incur a flag of suspicious behaviour (SUS=8) and

they tend not to activate promptly the card (WA=11), although the relevant coefficients turn

out not statistically significant.

6. Conclusions
From the literature review, it emerges that there is a limited number of studies on banking

credit card risk exposure. Mainly, current empirical research concentrates on the application

scoring phase, where relatively sophisticated methodologies are applied to assess whether to

issue a credit (e.g. loans, mortgages, revolving cards) to consumers who apply for it. The lack

of banking microeconomic data offer limited estimations of the risk exposure within the

credit-bureau and collection scoring phases. Such analyses are mostly run by institutions and

organisations themselves, or outsourcing institutions. Yet, the fraud detection analysis, within

the credit-bureau scoring process, is finding greater application amongst academics and

12
practitioners, particularly for e-banking cases. As pointed out in the literature review, a great

number of studies make use of econometric approaches in estimating risk exposure.

This paper has explored the factors that influence banking risk exposure within the credit

card market. To this aim, a static multinomial logit model has been estimated, where several

type of risks have been considered that is: operational risk (i.e. fraud, card stolen, card lost,

card lost during postage and suspicious of fraud), credit risk (i.e. suspended, revoked and

revoked not given back) and business risk expressed in terms of a lower number of

transactions that translates into a loss of potential profit (i.e. immediate renounce, renounce at

expire date and waiting for activation). Profitability has in fact been considered as a key

success driver combined with other strategic factors. A set of socio-economic (i.e. gender,

age, location and credit line) and banking specific variables (i.e. credit card type, conversion,

forced, circuit and ownership) have been included on the right hand side of the equation.

Data were obtained from recent account archives for bankcards issued throughout Italy.

The results have shown that operational risk is influenced by many determinants: gender,

age, location, type of circuit and credit card type. Women have been found to have a higher

probability to incur in a fraud and to have their card stolen (1.70 times more likely).

Customers within the range of age between 36 and 55 are more likely to have, or to be

victims, of fraudulent activity on their card. Geographic location also plays an important

role. The risk of fraud is higher in the Centre, North-East and North-West of Italy.

Furthermore, owners of a classic and gold card have been found to be riskier than revolving

cards, as expected.

Regarding credit risk, the riskier are customers are those who are resident in the Centre

and North-West of the country and own either a revolving or gold card. The converted and

forced cards are more likely to experience a suspension, as customers find difficulties in

paying-off their debt.

13
 Finally, the riskier groups for the business are females, customers aged more than 65

years old, those who own a gold card, who belong to the II circuit and have had a forced card

(they all wait longer to activate their credit card). Costumers who revoked their card are those

who are aged 65 or more, resident in the North-East, own a revolving card and have had it

forced.

This information, gathered from an existing credit card portfolio, has enabled a

systematic evaluation and detailed breakdown of the risks inherent in the portfolio. The

empirical findings offer an important insight into the characteristics and behaviour of a pool

of clients and on the potential factors that may lead to risky events that have a negative

impact on profitability performance. This information can be tied into strategic programs

aimed at detecting, managing and controlling the risk exposure. Furthermore, customer

information and education may considerably reduce certain type of risks such as card thefts,

that represent a substantial operational risk. Marketing and customer services policies may be

also enhanced to reduce risk and achieve a better profitability performance for the business.

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Table 1
Total number of debit-credit cards (C ); number cards per capita (CP);
average transaction in euros (AT); average annual transactions per card (AATC) - 2007

16
 Countries C (000) CP AT (euros) AATC
UK* 146,300 2.4 76.9 49.8
France 82,432 1.3 50.5 74.5
Spain* 76,395 1.7 49.8 26.0
Germany 108,748 1.3 65.7 19.1
Italy* 79,597 1.3 97.0 19.3
Western Europe 528,395 1.5 75.9 29.4
East Europe 78,988 0.8 43.0 24.1
North Europe 79,597 1.7 53.3 83.6
EU 686,980 1.4 60.0 39.7
Turkey 92,845 1.3 77.3 22.2
Russia 103,316 0.7 106.8 15.7
USA 1,600,610 5.3 41.5 33.6
Japan 699,660 5.5 50.9** 6.5**
India 135,000 0.1 3.3 2.3
NOTE.-- Source Assofin-CRIF-Gfk, 2009; * data on 2008 ** data on 2006.

Table 2
Annual credit card expenditure over GDP (AEX%);
number of POS per 1,000 inhabitants;
number of ATM per 1,000 inhabitants - 2007
Contries AEX(%) POS ATM
UK 27.1 17 1.04
France 16.4 19 0.82
Spain 9.2 30 1.34
Germany 5.6 7 0.83
Italy 8.4 20 0.81
North Europe 16.1 18 0.71
Eastern Europe 8.3 6 0.38
USA 23.8 17 1.31
NOTE.-- Source Assofin-CRIF-Eurisko, 2009.

Table 3
Summary statistics of the dependent variable – risk (rk)
Risk category Freq. Percent
Cum.
------------
+-----------------------------------
0 NF | 209,319 65.98
65.98
1 F | 2,777 0.88
66.86
2 ST | 3,157 1.00
67.85
3 LS | 4,316 1.36
69.21
4 LSP | 635 0.20
69.41
5 SUS | 659 0.21
70.86
6 SU | 3,124 0.98
70.40
7 RV | 374 0.12
70.52
8 RVNB | 436 0.14
70.65

17
 9 IR | 619 0.20
71.06
10 RD | 77,375 24.39
95.45
11 WA | 14,441 4.55
100.00
------------
+-----------------------------------
Total | 317,232 100.00

18
Table 4
Descriptive statistics of dichotomous variables
Operational Risk Credit Risk Business Risk
NR=0 F=1 ST=2 LS=3 LSP=4 SUS=5 SU=6 RV=7 RVNB=8 IR=9 RD=10 WA=11 total
Gen
Male 128,113 1,662 1,495 2,874 359 420 2,103 250 310 390 47,023 8,493 193,492
Female 81,206 1,115 1,662 1,442 276 239 1,021 124 126 229 30,352 5,948 123,740
Total 209,319 2,777 3,157 4,316 635 659 3,124 374 436 619 77,375 14,441 317,232
Pearson χ2= 424.61 (0.000)
Age
ag1825 6,259 50 137 180 14 23 201 13 24 29 2,106 1,002 10,038
ag2635 45,885 561 791 1,103 130 147 958 108 135 135 16,174 3,569 69,696
ag3645 64,792 1,037 887 1,297 215 194 1,017 134 163 186 24,624 3,612 98,158
ag4655 50,194 654 732 916 160 147 602 80 75 147 18,455 2,749 74,911
ag5665 28,936 343 431 533 80 99 255 30 31 77 10,472 1,842 43,129
ag6675 10,652 106 141 225 27 39 74 6 7 32 4,025 1,084 16,418
ag7699 2,601 26 38 62 9 10 17 3 1 13 1,519 583 4,882
Total 209,319 2,777 3,157 4,316 635 659 3,124 374 436 619 77,375 14,441 317,232
Pearson χ2= 4,000 (0.000)
Location
nw 5,543 105.2 94 127 33 20 82 20 18 22 2,107 254 8,424
ne 89,196 1,356 1,940 1,822 220 294 1,335 124 139 270 38,902 4,049 139,646
cen 9,263 228.2 169 245 46 44 143 24 40 19 3,236 364 13,820
sou 47,733 691 556 1,102 142 111 616 115 115 146 13,564 1,180 66,070
is 57,586 396 398 1,019 196 190 947 90 124 163 19,568 8,594 89,270
Total 209,319 2,777 3,157 4,315 637 659 3,123 373 436 620 77,375 14,441 317,232
Pearson χ2= 1.0+e4 (0.000)
Card type
Classic 143,876 2,313 2,391 3,264 481 483 1,634 246 219 306 33,071 2,468 190,752
Gold 8,620 173 156 227 29 27 54 3 14 14 909 444 10,670
Revolving 56,823 291 610 825 125 149 1,436 125 203 299 43,395 11,529 115,810
total 209,319 2,777 3,157 4,316 635 659 3,124 374 436 619 77,375 14,441 317,232
Pearson χ2= 35,000 (0.000)

Conversion
no conversion 33,499 186 326 552 121 108 404 75 78 205 50,009 10,437 96,000
Conversion 175,820 2591 2,831 3,764 514 551 2,720 299 358 414 27,366 4,004 221,232
Total 209,319 2,777 3,157 4,316 635 659 3,124 374 436 619 77,375 14,441 317,232
Pearson χ2=7.80E+0.4 (0.000)
Forced card
Not forced card 184,661 2,697 2,900 4,004 581 585 2,423 341 338 414 39,535 4,006 242,485
Forced card 24,658 80 257 312 54 74 701 33 98 205 37,840 10,435 74,747
Total 209,319 2,777 3,157 4,316 635 659 3,124 374 436 619 77,375 14,441 317,232
Pearson χ2=6.5+e0.4(0.000)
Circuit
I circuit 152,496 2,486 2,547 3,491 510 510 1,688 249 233 320 33,980 2,912 201,422
II circuit 56,823 291 610 825 125 149 1,436 125 203 299 43,395 11,529 115,810
Total 209,319 2,777 3,157 4,316 635 659 3,124 374 436 619 77,375 14,441 317,232
Pearson χ2= 3.4+e0.4 (0.000)
Ownership
principal 202,109 2,676 3,039 4,188 600 634 3,112 371 432 608 76,462 14,301 308,532
secondary 7,210 101 118 128 35 25 12 3 4 11 913 140 8,700
Total 209,319 2,777 3,157 4,316 635 659 3,124 374 436 619 77,375 14,441 317,232
Pearson χ2=1.4+e0.3(0.000)

Notes: p.value in parenthesis

20
Table 5 Multinomial Logit regression results (Odds ratio)
Operational Risk Credit Risk Business Risk
F=1 ST=2 LS=3 LSP=4 SUS=5 SU=6 RV=7 RVNB=8 IR=9 RD=10 WA=11
Genger (ref. male)
gen 1.061 1.705 *** 0.798 *** 1.189 ** 0.877 0.731 *** 0.777 ** 0.627 *** 0.913 0.990 1.036 *
Age (ref. ag1825)
ag2635 1.411 ** 0.772 *** 0.776 *** 1.138 0.856 0.767 *** 0.997 0.854 0.700 * 1.018 0.773 ***
ag3645 1.814 *** 0.624 *** 0.625 *** 1.241 0.784 0.636 *** 0.835 0.770 0.703 * 1.004 0.685 ***
ag4655 1.518 *** 0.702 *** 0.561 *** 1.129 0.755 0.513 *** 0.620 0.467 *** 0.724 0.918 *** 0.691 ***
ag5665 1.370 ** 0.739 *** 0.556 *** 0.972 0.864 0.390 *** 0.418 *** 0.344 *** 0.695 0.984 0.802 ***
ag6675 1.135 0.663 *** 0.641 *** 0.933 0.926 0.301 *** 0.245 *** 0.208 *** 0.821 1.184 *** 1.115 **
ag6699 1.204 0.752 0.743 ** 1.313 0.996 0.283 *** 0.516 0.122 ** 1.292 1.645 *** 1.733 ***
Location (ref. Islands)
nw 1.988 *** 2.021 *** 1.064 1.425 * 0.963 0.610 *** 1.607 * 1.181 1.377 2.050 *** 0.571 ***
ne 1.520 *** 2.436 *** 0.894 ** 0.561 *** 0.833 * 0.583 *** 0.541 *** 0.534 *** 1.013 2.269 *** 0.613 ***
cent 2.481 *** 2.146 *** 1.199 ** 1.182 1.247 0.731 *** 1.242 1.791 *** 0.805 1.969 *** 0.699 ***
sou 1.352 *** 1.352 *** 0.968 0.663 *** 0.578 *** 0.559 *** 0.902 0.911 1.167 1.754 *** 0.698 ***
Credit card type (ref. classic)
gcc 1.075 1.004 1.141 1.131 0.912 1.425 ** 0.402 2.570 *** 1.228 0.720 *** 4.344 ***
rcc 0.466 *** 0.701 *** 0.764 *** 0.765 ** 0.744 ** 1.856 *** 1.824 *** 2.078 *** 1.367 *** 0.818 *** 1.980 ***
Conversion (ref. not converted cards)
rm 0.916 0.845 ** 0.796 *** 0.512 *** 0.887 3.404 *** 0.420 *** 1.719 *** 0.767 ** 0.103 *** 0.386 ***
Forced (ref. not forced cards)
frc 0.444 *** 0.788 ** 0.670 *** 0.630 ** 1.167 2.445 *** 0.261 *** 1.708 *** 2.304 *** 1.493 *** 5.969 ***
Circuit (ref. I circuit)
cr 0.338 *** 0.505 *** 0.480 *** 0.309 *** 0.584 *** 0.651 *** 0.115 *** 0.790 ** 0.855 0.923 *** 4.830 ***
Ownership (ref. primary)
hl 0.887 0.849 * 0.894 1.556 ** 1.120 0.157 *** 0.322 ** 0.435 * 0.781 0.855 *** 1.145
Credit line
cl ^ 1.000 * 1.000 ** 1.000 0.999 1.000 0.999 *** 0.999 ** 0.999 *** 0.999 ** 0.999 *** 1.000
Pseudo 0.168 LR 107,104.67 *** Log -265234.16
Number of obs. 317,232 R2 χ2(198) likelihood
Notes: *** , ** and * indicate statistically significance at the 1%, 5% and 10% level, respectively.

22
Table 6
LR test and Wald test (H0 : All coefficients associated with a given variable are 0)

VARIABLES | LR chi2
VARIABLES Wald
df P>chi2 | chi2 df P>chi2
-------------+------------------------- -------------+-------------------------
gen | 369.843 11 0.000 gen | 373.694 11 0.000
age2635 | 73.004 11 0.000 age2635 | 71.452 11 0.000
age3645 | 183.632 11 0.000 age3645 | 177.517 11 0.000
age4655 | 196.293 11 0.000 age4655 | 185.368 11 0.000
age5665 | 186.973 11 0.000 age5665 | 176.711 11 0.000
age6675 | 160.148 11 0.000 age6675 | 174.660 11 0.000
age7699 | 188.337 11 0.000 age7699 | 207.517 11 0.000
nw | 761.823 11 0.000 nw | 757.998 11 0.000
ne | 4884.848 11 0.000 ne | 5145.572 11 0.000
cen | 966.244 11 0.000 cen | 940.943 11 0.000
sou | 1549.232 11 0.000 sou | 1574.679 11 0.000
cr | 5439.703 11 0.000 gcc | 501.945 11 0.000
hl | 79.600 11 0.000 rcc | 911.513 11 0.000
rm | 23379.350 11 0.000 rm | 25772.063 11 0.000
frc | 2470.453 11 0.000 frc | 2698.555 11 0.000
gcc | 585.251 11 0.000 cr | 6162.202 11 0.000
rcc | 926.688 11 0.000 hl | 120.550 11 0.000
cl | 327.912 11 0.000 cl | 408.572 11 0.000
--------------------------------------- ---------------------------------------
APPENDIX A
The dependent variable used in the multinomial logit model is risk and it is given

by the following eleven categories, using the not at-risk positions as the base category:

0 = positions not at-risk (NR).

1 = fraud (F).

2 = stolen (ST): cards that have been stolen while held by customers.

3 = lost (LS): cards that have been lost by customers.

4 = lost during postage (LSP).

5 = suspicious (SUS): cards under suspicion of fraud, e.g. because of a high number of

transactions etc..

6 = suspension (SU): cards temporarily blocked by the issuer given a status of

insolvency.

7 = revoked (RV): cards revoked because of serious insolvency.

8 = revoked and not given back (RVNB): cards revoked because of serious insolvency,

however, the plastic is still in the hands by the customer.

9 = immediate renounce (IR).

10 = renounced at expiry date (RD).

11 = waiting for activation (WA): the card has not yet been activated by the customer.

A set of socio-economic and banking specific control variables are also included

into the model, as follows:

• Gender (gen) - This dichotomous variable takes the value one if female, zero if

male.

• Age (ag) - Six dummy variables are included as age groups indicators (ag2635,

ag3645, ag4655, ag5665, ag6675 and ag7699), leaving the group of customers

between 18 and 25 as the reference category.

24
• Location - These dummy variables take into account the geographical

heterogeneities of Italy. Standard definitions of geographical zones are employed

(ISTAT, 2009): North West (nw), North East (ne), Centre (cen), South (sou) that is also

used as the reference category and Islands (isl, Sardinia and Sicily) used as the

reference category. The locations of the cardholder is given by a mapping of their

postal address zip code to geographical zone using tables produced by the Institute Post

Office.

• Credit card type – Three separate 0-1 dummy variables are constructed for

each credit card: gcc defines gold credit card, rcc defines revolving credit cards, ccc

defines classic credit cards and it is used as the reference category.

• Conversion – It indicates where the card has been subject to a reissue and the

signing of a new contract. The product substituted has similar commercial

characteristics. This dichotomous variable takes the value one if the card has been

converted, zero otherwise.

• Forced (frc)– This dummy variable takes the value one if the credit card has

been forced by the issuer and zero otherwise.

• Circuit (cr)– This dummy variable takes one as a value if the card has been

issued by the first circuit and zero by the second circuit.

• Ownership (hl)– This dummy variable takes the value one if the credit card has

been issued to a secondary owner and zero otherwise.

• Credit line (cl)– This is a continuous variable that accounts for the amount of

the spending limit of the card.

25