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9 - Validation of Retail Credit Risk Models

Published online by Cambridge University Press:  02 March 2023

By
Sang-Sub Lee  and
Feng Li
Edited by
David Lynch ,
Iftekhar Hasan  and
Akhtar Siddique
David Lynch
Affiliation:
Federal Reserve Board of Governors
Iftekhar Hasan
Affiliation:
Fordham University Graduate Schools of Business
Akhtar Siddique
Affiliation:
Office of the Comptroller of the Currency
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Summary

Retail credit risk is an important risk for many banks. This chapter describes various retail credit risk models in great detail and reviews the ways they may be validated. Validation principles are described for models used for risk management, stress testing and other applications. The classes of models include both static scoring models and multi-period loss forecasting models. Within the latter class, roll rate model, vintage-based model, and various other models are described. Account/loan level models are also described, including the Cox Proportional Hazard rate model and multinomial logit model. In each case, the authors discuss the academic underpinnings, the industry usage, and choices that are commonly made under various circumstances. The role of data in determining these choices is also discussed.

Keywords

Retail credit risk
Type
Chapter
Information
Validation of Risk Management Models for Financial Institutions
Theory and Practice
 , pp. 175 - 231
Publisher: Cambridge University Press
Print publication year: 2023

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