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  • 9 - Validation of Retail Credit Risk Models

  • Edited by David Lynch, Federal Reserve Board of Governors, Iftekhar Hasan, Fordham University Graduate Schools of Business, Akhtar Siddique, Office of the Comptroller of the Currency
  • Book:
    Validation of Risk Management Models for Financial Institutions
    Published online:
    02 March 2023
    Print publication:
    09 March 2023, pp 175-231

  • 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.