Definition of Default and Quality of Scoring Functions

19 Pages Posted: 5 Sep 2009

See all articles by Jiri Witzany

Jiri Witzany

University of Economics in Prague

Date Written: September 3, 2009


A retail bank consumer loan dataset is used to develop logistic regression based scoring functions with different definitions of default from a very broad to a narrow or hard. The performance of the scoring functions is compared with respect to the hard definition of default which indicates real losses suffered by the bank. The results confirm the hypothesis that the scoring functions developed on softer definitions of default perform worse than those developed on harder definitions of default. The conclusion is put into contrast with the observation that the Basel II regulation gives an incentive to use a rather soft definition of default in the rating and scoring process.

Keywords: credit risk, regulatory capital, default, scoring

JEL Classification: C35, C52, G28

Suggested Citation

Witzany, Jiri, Definition of Default and Quality of Scoring Functions (September 3, 2009). Available at SSRN: or

Jiri Witzany (Contact Author)

University of Economics in Prague ( email )

Winston Churchilla Sq. 4
Prague 3, 130 67
Czech Republic

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