Corporate Credit Scoring Models: Approaches and Standards for Successful Implementation

Abstract

A number of banks have recently undertaken a reassessment of their credit-lending process. The banks’ endeavors coincided with the efforts of a small, but growing number of vendors who have developed systems to assess both public and private corporations. The purpose of this article is to define the qualities of a carefully developed and rigorously tested credit modeling system for assessing the attractiveness of lending opportunities. We identify and discuss several types of credit evaluation systems and their relative importance. These systems are classified as primary (“group up” or “firm-intrinsic” approach) and supplementary (“top-down” or “firm capital market”) approaches. The crucial step in evaluating any of these systems is the thorough testing of the results and the establishment of rigorous standards for acceptance. In addition to these standards, we discuss the role that an acceptable credit system can play as the link between individual loan assessment and logically derived estimates of expected loss rates and loan pricing criteria.