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A Quantitative Approach to Credit Risk Management in the Underwriting Process for the Retail Portfolio

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  • Andreea Costea

Abstract

The core of this paper encloses a mathematical approach of credit risk management, based on a scorecard model used in the bank’s underwriting process. The main purpose of this paper is to present how to develop, validate and apply a rating model in practice. Using 21568 loan applications provided by one of the largest banks from Romania, a scorecard is built for the underwriting purposes. The customer data used in the modeling is based on socio-demographic characteristics. The model is developed according to a set of statistical methods for parameter estimation. A real-life example of how to use such a model in the strategic decisions of a bank is presented. The cut-off score for the acceptance of the applications is calibrated to a potential risk appetite of the main four banks in Romania. From an evaluative perspective, this paper is compatible with an exploratory approach to quantitative research methodology.

Suggested Citation

  • Andreea Costea, 2017. "A Quantitative Approach to Credit Risk Management in the Underwriting Process for the Retail Portfolio," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 20(63), pages 157-186, March.
    • Handle: RePEc:rej:journl:v:20:y:2017:i:63:p:157-186
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit risk management; Basel III; Retail Scorecard; Cut-off calibration;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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