Abstract
Enterprise risk management (ERM) has become an important topic in today's more complex, interrelated global business environment, replete with threats from natural, political, economic, and technical sources. Banks especially face financial risks, as the news makes ever more apparent in 2008. This paper demonstrates support to risk management through validation of predictive scorecards for a large bank. The bank developed a model to assess account creditworthiness. The model is validated and compared to credit bureau scores. Alternative methods of risk measurement are compared.
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Appendix. Informal definitions
Appendix. Informal definitions
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a)
Bad accounts refer to cases 90 days delinquent or worse, accounts closed with a ‘NA (non-accrual)’ status or that were written-off.
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b)
Good accounts were defined as those that did not meet the bad definition.
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c)
Credit score is a number that is based on a statistical analysis of a person's credit report, and is used to represent the creditworthiness of that person—the likelihood that the person will pay his or her debts.
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d)
A credit bureau is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses.
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e)
Custom score refers to the score assigned to existing customers or new applicants.
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f)
Beacon score is the credit score produced at the most recognized agency Equifax in Canada.
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g)
The FICO score is the credit score from Fair Isaac Corporation, a publicly traded corporation that created the best-known and most widely used credit score model in the United States.
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Wu, D., Olson, D. Enterprise risk management: coping with model risk in a large bank. J Oper Res Soc 61, 179–190 (2010). https://doi.org/10.1057/jors.2008.144
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DOI: https://doi.org/10.1057/jors.2008.144