Credit Scoring and Loan Default

Laying off Credit Risk: Loan Sales versus Credit Default Swaps∗

After making a loan, a bank finds out if the loan needs contract enforcement (“monitoring”); it also decides whether to lay off credit risk in order to release costly capital. A bank can lay off credit risk by either selling the loan or by buying insurance through a credit default swap (CDS). With a CDS, the originating bank retains the loan’s control rights but no longer has an incentive to mo...

Managing loan customers using misclassification patterns of credit scoring model

A number of credit scoring models have been developed to evaluate credit risk of new loan applicants and existing loan customers, respectively. This study proposes a method to manage existing customers by using misclassification patterns of credit scoring model. We divide two groups of customers, the currently good and bad credit customers, into two subgroups, respectively, according to whether...

Credit Scoring and Competitive Pricing of Default Risk

When people cannot commit to pay back their loans and there is limited information about their characteristics, lending institutions must draw inferences about their likelihood of default. In this paper, we examine how this inference problem impacts consumption smoothing. In particular, we study an environment populated by two types of people who differ with respect to their rates of time prefe...

Credit derivatives and loan pricing

This paper examines the relation between the new markets for credit default swaps (CDS) and banks’ pricing of syndicated loans to US corporates. We find that changes in CDS spreads have a significantly positive coefficient and explain about 25% of subsequent monthly changes in aggregate loan spreads during 2000–2005. Moreover, when compared to traditional explanatory factors, they turn out to b...

Valuation of Credit Default Swaptions and Credit Default Index Swaptions