Comparison of credit risk models for portfolios of retail loans based on behavioural scores

The fact that the Basel Accord formula is based on a corporate credit risk model and the mis-rating of mortgage backed securities which led to the credit crunch have highlighted that developing credit risk models for portfolios of retail loans is far less advanced than the equivalent modelling for portfolios of corporate loans. Yet for more three decades behavioural scoring has proved a very successful way of estimating the credit risk of individual consumer loans. Almost all lenders produce a behavioural score for every one of their loans every month. This paper reviews the different models that are being developed to use these individual behavioural scores to assess the credit risk at a portfolio level. The models have parallels with the types of corporate credit risk models, but differ because of the need to deal with the features specific to retail loans such as the months on books effect. Thus there are structural type models, ones based on hazard rates and ones that use Markov chain stochastic approaches