Economic Benefit of Powerful Credit Scoring

42 Pages Posted: 31 Jan 2005

See all articles by Andreas Bloechlinger

Andreas Bloechlinger

University of Applied Sciences Northwestern Switzerland

Markus Leippold

University of Zurich; Swiss Finance Institute

Date Written: January 2005

Abstract

In this paper, we study the economic benefits from using credit scoring models. We contribute to the literature by relating the discriminatory power of a credit scoring model to the optimal credit decision. Given the Receiver Operating Characteristic (ROC) curve of the credit scoring model, we derive a) the profit-maximizing cuttoff regime and b) the pricing curve. In addition, we study a stylized loan market model with banks that differ in the quality of their credit scoring model. We find that profitability varies substantially among lenders. More powerful credit scoring models lead to economically significant differences in credit portfolio performance.

Keywords: Bank loan pricing, credit scoring, discriminatory power, Receiver Operating Characteristic (ROC)

JEL Classification: D40, G21, H81

Suggested Citation

Bloechlinger, Andreas and Leippold, Markus, Economic Benefit of Powerful Credit Scoring (January 2005). Available at SSRN: https://ssrn.com/abstract=656961 or http://dx.doi.org/10.2139/ssrn.656961

Andreas Bloechlinger (Contact Author)

University of Applied Sciences Northwestern Switzerland ( email )

Riggenbachstrasse 16
Olten, Solothurn 4600
Switzerland

Markus Leippold

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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