Consumer credit-risk models via machine-learning algorithms
AbstractWe apply machine-learning techniques to construct nonlinear nonparametric forecasting models of consumer credit risk. By combining customer transactions and credit bureau data from January 2005 to April 2009 for a sample of a major commercial bank's customers, we are able to construct out-of-sample forecasts that significantly improve the classification rates of credit-card-holder delinquencies and defaults, with linear regression R2's of forecasted/realized delinquencies of 85%. Using conservative assumptions for the costs and benefits of cutting credit lines based on machine-learning forecasts, we estimate the cost savings to range from 6% to 25% of total losses. Moreover, the time-series patterns of estimated delinquency rates from this model over the course of the recent financial crisis suggest that aggregated consumer credit-risk analytics may have important applications in forecasting systemic risk.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 34 (2010)
Issue (Month): 11 (November)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jbf
Household behavior Consumer credit risk Credit card borrowing Machine learning Nonparametric estimation;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2010. "Benefits of relationship banking: evidence from consumer credit markets," Working Paper Series WP-2010-05, Federal Reserve Bank of Chicago.
- Zinman, Jonathan, 2009.
"Debit or credit?,"
Journal of Banking & Finance,
Elsevier, vol. 33(2), pages 358-366, February.
- Drehmann, Mathias & Sorensen, Steffen & Stringa, Marco, 2010. "The integrated impact of credit and interest rate risk on banks: A dynamic framework and stress testing application," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 713-729, April.
- John Simon & Kylie Smith & Tim West, 2009.
"Price Incentives and Consumer Payment Behaviour,"
RBA Research Discussion Papers
rdp2009-04, Reserve Bank of Australia.
- Avery, Robert B. & Calem, Paul S. & Canner, Glenn B., 2004. "Consumer credit scoring: Do situational circumstances matter?," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 835-856, April.
- Büyükkarabacak, Berrak & Valev, Neven T., 2010. "The role of household and business credit in banking crises," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1247-1256, June.
- Scholnick, Barry & Massoud, Nadia & Saunders, Anthony & Carbo-Valverde, Santiago & Rodríguez-Fernández, Francisco, 2008.
"The economics of credit cards, debit cards and ATMs: A survey and some new evidence,"
Journal of Banking & Finance,
Elsevier, vol. 32(8), pages 1468-1483, August.
- Carbó Valverde Santiago & Massoud Nadia & Rodríguez-Fernández Francisco & Saunders Anthony & Scholnick Barry, 2007. "The Economics of Credit Cards, Debit Cards and ATMs: A Survey and Some New Evidence," Working Papers 201074, Fundacion BBVA / BBVA Foundation.
- D. J. Hand & W. E. Henley, 1997. "Statistical Classification Methods in Consumer Credit Scoring: a Review," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 160(3), pages 523-541.
- Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
- Galindo, J & Tamayo, P, 2000. "Credit Risk Assessment Using Statistical and Machine Learning: Basic Methodology and Risk Modeling Applications," Computational Economics, Society for Computational Economics, vol. 15(1-2), pages 107-43, April.
- Dean P. Foster & Robert A. Stine, 2001. "Variable Selection in Data Mining: Building a Predictive Model for Bankruptcy," Center for Financial Institutions Working Papers 01-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Robert B. Avery & Paul S. Calem & Glenn B. Canner, 2003. "An overview of consumer data and credit reporting," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 47-73.
- Dwyer, Douglas W. & Stein, Roger M., 2006. "Inferring the default rate in a population by comparing two incomplete default databases," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 797-810, March.
- Pérignon, Christophe & Smith, Daniel R., 2010. "The level and quality of Value-at-Risk disclosure by commercial banks," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 362-377, February.
- Robert B. Avery & Paul S. Calem & Glenn B. Canner, 2004. "Consumer credit scoring: do situational circumstances matter?," BIS Working Papers 146, Bank for International Settlements.
- Stein, Roger M., 2005. "The relationship between default prediction and lending profits: Integrating ROC analysis and loan pricing," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1213-1236, May.
- Thomas, Lyn C., 2009. "Consumer Credit Models: Pricing, Profit and Portfolios," OUP Catalogue, Oxford University Press, number 9780199232130.
- Òscar Jordà & Alan M. Taylor, 2009.
"The Carry Trade and Fundamentals: Nothing to Fear But FEER Itself,"
NBER Working Papers
15518, National Bureau of Economic Research, Inc.
- Jordà, Òscar & Taylor, Alan M., 2012. "The carry trade and fundamentals: Nothing to fear but FEER itself," Journal of International Economics, Elsevier, vol. 88(1), pages 74-90.
- Jordà, Òscar & Taylor, Alan M., 2009. "The Carry Trade and Fundamentals: Nothing to Fear But FEER Itself," CEPR Discussion Papers 7568, C.E.P.R. Discussion Papers.
- Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2010.
"Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons,"
NBER Working Papers
16567, National Bureau of Economic Research, Inc.
- �scar Jord� & Moritz Schularick & Alan M Taylor, 2011. "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons," IMF Economic Review, Palgrave Macmillan, vol. 59(2), pages 340-378, June.
- Travis J. Berge & Òscar Jordà, 2011. "Evaluating the Classification of Economic Activity into Recessions and Expansions," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 246-77, April.
- Bücker, Michael & van Kampen, Maarten & Krämer, Walter, 2013. "Reject inference in consumer credit scoring with nonignorable missing data," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 1040-1045.
- Stanhouse, Bryan & Schwarzkopf, Al & Ingram, Matt, 2011. "A computational approach to pricing a bank credit line," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1341-1351, June.
- Dimitrios Bisias & Mark Flood & Andrew W. Lo & Stavros Valavanis, 2012. "A Survey of Systemic Risk Analytics," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 255-296, October.
- Aussenegg, Wolfgang & Resch, Florian & Winkler, Gerhard, 2011. "Pitfalls and remedies in testing the calibration quality of rating systems," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 698-708, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.