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The Generation of New Models

In: Credit Rating and Bank-Firm Relationships

Author

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  • Michele Modina

    (Università degli Studi del Molise)

Abstract

Early versions of the rating models were designed to introduce in the credit process the calculation of the probability of default (PD), in other words to group customers into classes based on their creditworthiness. The aim was to equip banks with a model to be used both in the acceptance/revision of a loan and in the monitoring of customer’s behavior. Based on this, the cornerstones of the architecture of credit rating were built: customer segmentation; the use of different profiles of investigation (quantitative, qualitative and sectorial) and their weighing according to the customer segment; the introduction of correction factors in case of prejudicial elements; and the determination of PD through a mapping process. The end result was to determine the theoretical pricing of a loan based on the creditworthiness of the borrower (risk-adjusted pricing).

Suggested Citation

  • Michele Modina, 2015. "The Generation of New Models," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Credit Rating and Bank-Firm Relationships, chapter 4, pages 73-83, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-1-137-49622-5_5
    DOI: 10.1057/9781137496225_5
    as

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