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Credit risk modeling strategies: the road to serfdom?

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  • Dirk‐Emma Baestaens

Abstract

This paper aims at presenting some practical issues in modeling default risk of a single commercial credit counterparty from the perspective of a large retail bank. We define default risk as the probability that a counterparty’s intrinsic credit quality deteriorates within a given time horizon such that contractual agreements cannot be honored. This work gives an insight into using scoring/rating models in a credit environment of a large European bank. Contrary to many banks, we did not define the segments in a first step with a view to developing the rating tools in a second step. Our approach has, to some extent, followed a different path. Iteratively, we both defined the borders for a particular segment and selected an appropriate rating tool. More particularly, customer segmentation has been carried out on the basis of various rating tools’ goodness‐of‐fit criteria. The topics cover customer segmentation using goodness‐of‐fit measures, data measurement levels and optimization algorithms, rating tool calibration to the central default tendency and communication to the end user. Copyright © 1999 John Wiley & Sons, Ltd.

Suggested Citation

  • Dirk‐Emma Baestaens, 1999. "Credit risk modeling strategies: the road to serfdom?," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 8(4), pages 225-235, December.
  • Handle: RePEc:wly:isacfm:v:8:y:1999:i:4:p:225-235
    DOI: 10.1002/(SICI)1099-1174(199912)8:43.0.CO;2-V
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    1. Zmijewski, Me, 1984. "Methodological Issues Related To The Estimation Of Financial Distress Prediction Models," Journal of Accounting Research, Wiley Blackwell, vol. 22, pages 59-82.
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    1. Şaban Çelik & Bora Aktan & Bruce Burton, 2022. "Firm dynamics and bankruptcy processes: A new theoretical model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(3), pages 567-591, April.
    2. Daniel E. O'Leary, 2009. "Downloads and citations in Intelligent Systems in Accounting, Finance and Management," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 16(1‐2), pages 21-31, January.

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