Credit Risk Scorecards Developing and Implementing Intelligent Credit Scoring
by Naeem Siddiqi
John Wiley & Sons, Inc.

Contents

chapter 1 Introduction

chapter 2 Scorecard Development: The People and the Process
  Scorecard Development Roles
  Scorecard Developer
  Product or Portfolio Risk Manager/Credit
  Scoring Manager
  Product Manager(s)
  Operational Manager(s)
  Project Manager
  IT/IS Managers 15
  Enterprise Risk/Corporate Risk Management
  Staff (Where Applicable) 15
  Legal Staff 16
  Intelligent Scorecard Development 16
  Scorecard Development and Implementation
  Process: Overview 17

chapter 3 Scorecard Development Process, Stage 1:
  Preliminaries and Planning 21
  Create Business Plan 21
  Identify Organizational Objectives and Scorecard Role 21
  Internal versus External Development and Scorecard Type 23
  Create Project Plan 24
  Identify Project Risks 25
  Identify Project Team 25
  Why “Scorecard” Format?

chapter 4 Scorecard Development Process, Stage 2:
  Data Review and Project Parameters 29
  Data Availability and Quality 29
  Data Gathering for Definition of Project Parameters 30
  Definition of Project Parameters 31
  Exclusions 31
  Performance and Sample Windows and “Bad” Definition 32
  Effects of Seasonality 37
  Definition of “Bad” 38
  Confirming the “Bad” Definition 40
“Good” and “Indeterminate” 43
Segmentation 45
Experience-Based (Heuristic) Segmentation 47
Statistically-Based Segmentation 50
Comparing Improvement 53
Choosing Segments 55
Methodology 56
Review of Implementation Plan 57

chapter 5 Scorecard Development Process, Stage 3:
Development Database Creation 59
Development Sample Specification 59
Selection of Characteristics 60
Sampling 63
Development/Validation 63
Good/Bad/Reject 63
Development Data Collection and Construction 65
Random and Representative 65
Nonsegmented Dataset 65
Data Quirks 66
Adjusting for Prior Probabilities 66
Offset Method 68
Sampling Weights 69

chapter 6 Scorecard Development Process, Stage 4:
Scorecard Development 73
Explore Data 74
Missing Values and Outliers 74
Correlation 76
Initial Characteristic Analysis 77
Statistical Measures 79
Logical Trend 83
Business/Operational Considerations
Preliminary Scorecard 88
Risk Profile Concept 88
Logistic Regression 89
Designing a Scorecard 92
Reject Inference 98
Reasons for Reject Inference 99
Reject Inference Techniques 102
Verification 112
Final Scorecard Production 113
Scaling 113
Points Allocation 118
Choosing a Scorecard 119
Misclassification 120
Scorecard Strength 121
Validation 127

chapter 7 Scorecard Development Process, Stage 5:
Scorecard Management Reports 131
Gains Table 132
Characteristic Reports 133
chapter 8 Scorecard Development Process, Stage 6:
Scorecard Implementation 135
Preimplementation Validation 135
System Stability Report 136
Characteristic Analysis Report 139
What if the Scorecard Does Not Validate? 141
Strategy Development 142
General Considerations 142
Scoring Strategy 143
Setting Cutoffs 146
Strategy Development Communication 151
Risk-Adjusted Actions 154
Policy Rules 157
Overrides 158

chapter 9 Scorecard Development Process, Stage 7:
Postimplementation 161
Scorecard and Portfolio Monitoring Reports 161
Scorecard Management Reports 164
Portfolio Performance Reports 177
Review 187