Credit Bureau Scoring
Credit Bureau Scoring denotes a Credit Scoring system that is based only on credit bureau / credit reference agency information. Credit Bureau Scoring can be used separately or alongside an internal credit scoring system (i.e., the scoring system can use credit bureau scores as part of the model attribute set)
ECB TRIM Requirements
Using all relevant information
Where an institution uses external credit bureau scores or external ratings as input variables in the rating process, and in particular when externally sourced scores are the main (or one of the main) input variable(s) of the overall internal rating, there is a risk that an internal model may not consider all relevant information.
Institutions mitigate this risk when they comply with the following principles:
- The external scores or ratings and/or data are regularly updated or refreshed, especially where credit bureau information is dynamic and is used not only for the application rating but also for the ongoing behavioural rating.
- Institutions understand the structure and nature of external scores or ratings and their key drivers. They also regularly verify that the results of the credit bureau score continue to be appropriate input variables in their credit rating process, for example by reviewing any changes in the credit bureau score methodology.
- Validation requirements are similar to those applied to other input variables.
- Even when the external score or rating is the main (or one of the main) driver(s) of the internal rating, the institution ensures that all relevant internal information regarding the creditworthiness of the obligor is taken into account in the internal rating.
- When external scores or ratings are used as the main (or one of the main) driver(s) of the internal rating institutions should demonstrate a good understanding of the drivers affecting the external scores or ratings.
- Institutions should ensure that external providers inform them of all significant changes applied to the credit bureau scoring or the rating methodology.
- When external scores or ratings are used as the main (or one of the main) driver(s) of the internal rating, institutions demonstrate that the additional relevant internal information considered in the model and its weighting are sufficient to ensure that the internal rating does not merely replicate the results of the external bureau scores or the external ratings used.
- When institutions make use of external scores or ratings or any other judgement-based assessment provided by a third party as input variables in the rating process, they should ensure that any potential correlation between the relevant risk drivers does not lead to bias or a double-counting effect in the risk parameter estimates. This can be especially relevant in these cases, due to the potential use of duplicated information.
- The institution remains responsible for the performance of the model.
Preserving the internal Credit Rating Philosophy
The use of external ratings and/or scores may interfere with the adopted Credit Rating Philosophy. Therefore
- when using external scores or ratings (e.g. from an external bureau or external rating agency) as drivers for the purpose of risk differentiation within a specific model, institutions should identify the grade assignment dynamics embedded in the external rating and understand the effect on their own grade assignment dynamics, considering the other risk drivers used;
- when using external ratings as target variables for the purpose of risk differentiation within a specific model, institutions should take all necessary measures to preserve their own grade assignment dynamics, if necessary;
- when mapping internal grades to external grades in order to use external default rates to estimate PD, institutions should ensure that the grade assignment dynamics of the external ratings are sufficiently similar to their own internal grade assignment dynamics, or perform the necessary adjustments to compensate for any differences.
- ECB guide to internal models - Credit Risk, Sep 2018