Credit Scorecard Business Requirements
Credit Scorecard Business Requirements is the set of objectives and constraints set by an organization in the context of developing a Credit Scorecard.
Indicatively such requirements may specify:
- The business use of the scorecard, e.g. Risk Acceptance of new clients on the basis of a Credit Score, Behavioral Scoring, Regulatory Capital etc.
- The population (portfolio) characteristics to which the credit scorecard will be applied
- The type of Credit Risk, formalized as the Credit Event (or events) that the scorecard will help to manage (e.g. the definition of a bad loan, the Risk Horizon)
- The nature of the Credit Score produced, including whether and how it is linked to a Credit Rating System, a Probability of Default and related Risk Parameters
- Any constraints on the resources (data, algorithms, computational infrastructure) that can be used for the development and deployment of the scorecard
- The desired performance characteristics for accepting the deployment and/or continuing use of the scorecard
Selecting the type of scorecard
There is a large variety of possible credit scorecards. Selecting the right type requires identifying the concrete needs of the project in terms of abilities and functionality but also the practicalities of implementation (availability of data, computer systems, human expertise, degree of automation). Some key decision points that are relevant are as follows:
Availability of Data
Statistical Models have minimum requirements on data availability and Data Quality. In the absence of available data (or for other reasons) one may opt instead for more judgemental or Expert Based Models.
Credit Scorecards used by regulated financial institutions must comply with the requirements of all relevant regulatory bodies (those applicable in a given jurisdiction). This may place constraints on data requirements, model explainability etc.