I would like to receive updated information about credit risk principles. The Bank of Israel has recently published a supervisory framework based on BIS "Principles for the management of credit risk" (September 2000). In their circular they emphasized the fact that the framework is based on updated issues and best practices. I assume that a lot of relevant materials such as implementation methodology, bulletins and brochures, "points of view", and etc, available, but can't find some laconical executive summary.
Would appreciate any help!
Replies
Thank all of you very much! I will try your references, it seems to be relevant. In any case i would still like to get additional ideas!
Artyom, take a look at the International Association of Credit Portfolio Managers (http://www.iacpm.org/). Their website contains best practice docs (http://www.iacpm.org/library/public_documents/public-documents.dot) and they run events to ensure people are up to date on latest developments. I wish you success in your endeavours.
In the US, major credit grantors rely largely on statistical credit scoring. FICO is the leading provider. The essentials: collect data from credit applications for the past 18 months or so. Identify 1000 to 1500 bad accounts: charge-offs, bankruptcies, 90+ days delinquent. Collect a comparable sized sample of good accounts. Use discriminant function analysis, logistic regression, or some other such technique to find the information items that most strongly differentiate goods from bads. Translate this into a linear scoring system: so many points for each possible answer to each relevant question. (Often credit reports are also included. In this case, derogatory reports generally get the person assigned a lot of negative points.)
Advantages: combines the information available to all loan officers; consistent; legally easily defensible as unbiased. Disadvantages: totally dependent on the assumption that the near-term future will look like the 18-month past as depicted by the variables you collected. One reason for the 2008-2009 financial crisis is that this assumption did not hold, on a broad scale. I tried to explain this in June 2011 in an article in Analytics, the on-line magazine of INFORMS, the national operations research / management science. Click http://viewer.zmags.com/publication/cd67856a#/cd67856a/12 to read it, if you're interested.
Doug Samuelson
InfoLogix, Inc.
Annandale, VA
try one of the rating agency websites...they have good summaries on credit risk and their view of credit in general