Discriminatory Power

From Open Risk Manual


Discriminatory Power (also Predictive Power, Scorecard Strength) in the context of Credit Risk analysis is the ability to discriminate ex ante between defaulting and non-defaulting borrowers. The discriminatory power of any classification procedure (e.g. a Credit Scorecard) can be assessed using a number of statistical measures of discrimination.

Statistical Measures of Discriminatory Power

The following measures have been suggested in the literature or are popular in the financial industry[1]

Role in Basel II regulation

Tests of the discriminatory power of a credit rating system are one of the two major quantitative tests required for assessing the suitability of such a system for calculating Risk Capital requirements for regulated financial institutions (the other broad area being the assessment of calibration quality).


  1. BIS Working Paper No. 14 Studies on the Validation of Internal Rating Systems