Definition
Credit Rating Model is a generic description for Credit Risk models applied principally to commercial (corporate) lending (where it may be denoted Wholesale Rating Model if produced internally by a Financial Institution). The term applies also to other types of lending (such as Sovereign / Government Loans and Bonds, Project Finance etc).
Corporate Rating Models are denoted sometimes as Non Retail Models to distinguish from the broad class of Retail Credit Rating models and SME Credit Score models. These later categories will typically be more statistically oriented (using more directly historical credit performance datasets).
Model Types
There is a large variety of possible wholesale credit rating models depending on the nature of the exposure and the available data. This list includes:
- Expert based scorecards
- Statistical scorecards where data is available (e.g. Z-score)
- Structural credit rating models deriving from the theoretical work of Merton on the exercise of options
- Cashflow Simulation based models when the credit risk is linked explictly to the proceeds of a project
Issues and Challenges
- Due to the nature of corporate portfolios (fewer and larger entities with infrequent default) this type of model is more likely to be susceptible to issues associated with low default portfolios and Model Risk
