A Risk Professional's Survival Guide: Applied Best Practices in Risk Management

CHAPTER 6 Consumer Credit Risk Measurement

OVERVIEW

Within the U.S. commercial banking sector, the consumer credit market comprises a variety of loan types, making up approximately 40 percent of loan portfolios (Figure 6.1). Considerable variation in consumer loan types exists across several dimensions including whether the loan is unsecured (e.g., credit card) or secured by underlying collateral (such as a residential mortgage) term, amortization schedule, and note rate, among others. These features can have profound impacts on the credit risk exposure of consumer loans. In measuring the credit risk of a consumer loan portfolio, the product features of each loan type along with borrower, collateral, and macroeconomic factors feature prominently in estimating credit risk. Techniques to estimate credit risk are comparable across consumer loan types, although over the years some product types adopted statistically driven measures earlier than others. Credit card businesses have relied upon sophisticated data mining techniques to stratify and estimate credit risk on their portfolios for many years, while the use of such models for mortgage loans accelerated in the mid-1990s with the advent of statistically based automated underwriting systems (AUS).¹ In this chapter, techniques to directly measure default incidence and loss severity will be highlighted across several consumer loan types, pointing out issues and approaches to handling unique aspects of each type.

Figure 6.1 ...