4. What is Credit Scoring?
A statistical means of providing a quantifiable risk factor for a given
applicant.
Credit scoring is a process whereby information provided is converted into
numbers to arrive at a score.
The objective is to forecast future performance from past behavior of
clients (SME or individuals).
Credit scoring are used in many areas of industries:
Banking
Decision Models Finance
Insurance
Retail
Telecommunications
5.
6. Bankruptcy prediction problem
• Predict financial distress of private companies one year ahead
based on account balance sheet from previous years.
• Enventualy the probability to become so.
• Obtain reliable data from up to 5 previous years before failure
• Classify and release warning signs
7. The curse of dimensionality
Problems
• Sparness of the search space
• Presence of Irrelevant Features
• Poor generalization of Learning Machine
• Exceptions difficult to identify
Solutions
• Dimensionality reduction: feature selection
• Constrain the complexity of the Learning Machine
8. The Diane Database
• Financial statements of French companies, initially of 60,000
industrial French companies, for the years of 2002 to 2006,
with at least 10 employees
• 3,000 were declared bankrupted in 2007 or presented a
• restructuring plan 30 financial ratios which allow the
description of firms in terms of the financial strength,
liquidity, solvability, productivity of labor and capital, margins,
net profitability and return on investment
9. The inputs
Number of employees Net Current Assets/Turnover (days)
Financial Debt / Capital Employed (%) Working Capital Needs / Turnover (%)
Capital Employed / Fixed Assets Export (%)
Depreciation of Tangible Assets (%) Value added per employee
Working capital / current assets Total Assets / Turnover
Current ratio Operating Profit Margin (%)
Liquidity ratio Net Profit Margin (%)
Stock Turnover days Added Value Margin (%)
Collection period Part of Employees (%)
Credit Period Return on Capital Employed (%)
Turnover per Employee Return on Total Assets (%)
Interest / Turnover EBIT Margin (%)
Debt Period (days) EBITDA Margin (%)
Financial Debt / Equity (%) Cashflow / Turnover (%)
Financial Debt / Cashflow Working Capital / Turnover (days)
10. 6 Hard problem
Class 0
Class 1
4
2
λ
2
0
3 4 5 6 7
λ
1
First two principal component from PCA
11. How HLVQ-C works
1.5
After
? Class 0
Class 1
Before d2
1.0 Y
d1
0.5 X
0
0 0.5 1.0 1.5
12. DIANE 1 (error %)
Model Error I Error II Total
MDA 26.4 21.0 23.7
SVM 17.6 12.2 14.8
MLP 25.7 13.1 19.4
HLVQ-C 11.1 10.6 10.8
15. Results I – 30 days into arrears
G
Classifier Accuracy (%) Type I Type II
54.8
Logistic 66.3 27.3 40.1
61.1
MLP 67.5 8.1 57.1
52.3
SVM 64.9 35.6 34.6
55.7
AdaboostM1 69.0 12.6 49.4
52.3
HLVQ-C 72.6 5.3 49.5
16. Results I – 60 days into arrears
G
Classifier Accuracy Type I Type II
21.2
Logistic 81.2 48.2 11.0
20.1
MLP 82.3 57.4 9.1
19.3
SVM 83.3 38.1 12.4
14.7
AdaboostM1 84.1 45.7 8.0
11.9
HLVQ-C 86.5 48.3 6.2
17. DIANE II (2002 – 2007)
• More data
• Longer history
• More features
18. Results
Classifier Accuracy Type I Type II
Logistic 91.25 6.33 11.17
Year
2006 MLP 91.17 6.33 11.33
C-SVM 92.42 5.16 10.00
AdaboostM1 89.75 8.16 12.33
Classifier Accuracy Type I Type II
Logistic 79.92 19.50 20.67
Year
MLP 75.83 24.50 23.83
2005
C-SVM 80.00 21.17 18.83
AdaboostM1 78.17 20.50 23.17
19. How useful?
η = NV [ x(1 − eI ) − (1 − x)eII m]
x eII
> mG > m
1− e
1− x I
41. Networks Analysis
A world of possibilities
• Identify critical nodes / links / clusters
• Detailed information of dynamics
• Stability / robustness of system
• Information / crisis Propagation
• Stress tests
42.
43.
44. Team
Business Director of IT Researcher Marketing
Director Research
João Carvalho das Neves Armando Vieira Bernardete Ribeiro Tiago Marques
Professor of Professor of Physics, & Associate Professor Marketing and
Management, ISEG. entrepreneur. Ph.D. in of Computer Business
Ph.D. in Business Physics and researcher Science, University Consultant,
Administration, in Artificial Intelligence Coimbra, E-Business
Manchester Business researcher at Specialist,
School CISUC.
10+ years experience in AI
25 years experience in Credit Risk & Financial Analysis
15 years of marketing experience
45. W do banks need in credit
hat
management?
Efficiency Accuracy
Savings of Capital – Basel requirements
This is a highly regulated industry with detailed and focused regulators
46. W do they get?
hat
Non-performing loans - Europe % Corporate Debt Default -
250
Portugal 4.5
4
2008
200 2009
3.5
3
Billions of EUR
150
NPL (%)
2.5
2
100
1.5
50 1
0.5
0
0
Germany UK Spain It aly Russia Greece
2005 2006 2007 2008 2009
Source: Issue 2 of NP E
L urope, a publication overing non-performing loan
(NPL) markets in Europe and the United Kingdom (UK)., Source: Bank of Portugal
PriceWaterhouseCoopers
Boosting the accuracy of credit risk methodologies will lead to considerable gains for banks
the banking industry is a highly regulated industry with detailed and focused regulators Fast, fully adaptable, performance and accuracy Commercial Benefits Cost Reduction Investor Scale Negócio que irá permanecer com alta procura ROI Of the team An experienced team, where the whole is far greater than the sum of its parts
Boosting the accuracy of credit risk methodologies used by banks and financial institutions may lead to considerable gains. Default rate in Portugal has more than double in the past 5 years Similary in Europe NPL increase by over 25%, many as much as 50% 620 billion euros in 2009 For example, improving the accuracy of credit risk assessment models by only 1% may lead to a gain in banking sector of about 50 million Euros - in Portugal alone