FIN-03-007 |
NYU Stern School of Business |
February 2003
Linda Allen, Gayle DeLong and Anthony Saunders
ABSTRACT
Retail loan markets create special challenges for credit risk assessment. Borrowers tend to be
informationally opaque and borrow relatively infrequently. Retail loans are illiquid and do not
trade in secondary markets. For these reasons, historical credit databases are usually not available
for retail loans. Moreover, even when data are available, retail loan values are small in absolute
terms and therefore application of sophisticated modeling is usually not cost effective on an
individual loan-by-loan basis. These features of retail lending have led to the development of
techniques that rely on portfolio aggregation in order to measure retail credit risk exposure. BIS
proposals for the Basel New Capital Accord differentiate portfolios of mortgage loans from
revolving credit loan portfolios from other retail loan portfolios in assessing the bank’s minimum
capital requirement. We survey the most recent BIS proposals for the credit risk measurement of
retail credits in capital regulations. We also describe the recent trend away from relationship
lending toward transactional lending, even in the small business loan arena traditionally
characterized by small banks extending relationship loans to small businesses. These trends
create the opportunity to adopt more analytical, data-based approaches to credit risk
measurement. We survey proprietary credit scoring models (such as Fair, Isaac and SMEloan), as
well as options-theoretic structural models (such as KMV and Moody’s RiskCalc) and reduced
form models (such as Credit Risk Plus).
Linda Allen
Institution: Zicklin School of Business, Baruch College 17
Email: Linda_Allen@baruch.cuny.edu
Gayle DeLong
Institution: Zicklin School of Business, Baruch College 17
Email: Gayle_DeLong@baruch.cuny.edu
Anthony Saunders
Institution: Stern School of Business, New York University
Telephone: (212) 998-0711
Email: asaunder@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~asaunder/
To download a copy of this paper click here
To request a copy of this paper click here
|