NAEEM SIDDIQI is the Director of Credit Scoring and Decisioning with SAS® Institute. He has more than twenty years of experience in credit risk management, both as a consultant and as a user at financial institutions. He played a key role in developing SAS® Credit Scoring and continues to provide worldwide support for the initiative.

• Acknowledgments xiii Chapter 1 Introduction 1Scorecards: General Overview 9Notes 18Chapter 2 Scorecard Development: The People and the Process 19Scorecard Development Roles 21Intelligent Scorecard Development 31Scorecard Development and Implementation Process: Overview 31Notes 34Chapter 3 Designing the Infrastructure for Scorecard Development 35Data Gathering and Organization 39Creation of Modeling Data Sets 41Data Mining/Scorecard Development 41Validation/Backtesting 43Model Implementation 43Reporting and Analytics 44Note 44Chapter 4 Scorecard Development Process, Stage 1: Preliminaries and Planning 45Create Business Plan 46Create Project Plan 57Why “Scorecard” Format? 60Notes 61Chapter 5 Managing the Risks of In-House Scorecard Development 63Human Resource Risk 65Technology and Knowledge Stagnation Risk 68Chapter 6 Scorecard Development Process, Stage 2: Data Review and Project Parameters 73Data Availability and Quality Review 74Data Gathering for Definition of Project Parameters 77Defi nition of Project Parameters 78Segmentation 103Methodology 116Review of Implementation Plan 117Notes 118Chapter 7 Default Definition under Basel 119Introduction 120Default Event 121Prediction Horizon and Default Rate 124Validation of Default Rate and Recalibration 126Application Scoring and Basel II 128Summary 129Notes 130Chapter 8 Scorecard Development Process, Stage 3: Development Database Creation 131Development Sample Specification 132Sampling 140Development Data Collection and Construction 142Adjusting for Prior Probabilities 144Notes 148Chapter 9 Big Data: Emerging Technology for Today’s Credit Analyst 149The Four V’s of Big Data for Credit Scoring 150Credit Scoring and the Data Collection Process 158Credit Scoring in the Era of Big Data 159Ethical Considerations of Credit Scoring in the Era of Big Data 164Conclusion 170Notes 171Chapter 10 Scorecard Development Process, Stage 4: Scorecard Development 173Explore Data 175Missing Values and Outliers 175Correlation 178Initial Characteristic Analysis 179Preliminary Scorecard 200Reject Inference 215Final Scorecard Production 236Choosing a Scorecard 246Validation 258Notes 262Chapter 11 Scorecard Development Process, Stage 5: Scorecard Management Reports 265Gains Table 267Characteristic Reports 273Chapter 12 Scorecard Development Process, Stage 6: Scorecard Implementation 275Pre-implementation Validation 276Strategy Development 291Notes 318Chapter 13 Validating Generic Vendor Scorecards 319Introduction 320Vendor Management Considerations 323Vendor Model Purpose 326Model Estimation Methodology 331Validation Assessment 337Vendor Model Implementation and Deployment 340Considerations for Ongoing Monitoring 341Ongoing Quality Assurance of the Vendor 351Get Involved 352Appendix: Key Considerations for Vendor Scorecard Validations 353Notes 355Chapter 14 Scorecard Development Process, Stage 7: Post-implementation 359Scorecard and Portfolio Monitoring Reports 360Reacting to Changes 377Review 399Notes 401Appendix A: Common Variables Used in Credit Scoring 403Appendix B: End-to-End Example of Scorecard Creation 411Bibliography 417About the Author 425About the Contributing Authors 427Index 429

NAEEM SIDDIQI is the Director of Credit Scoring and Decisioning with SAS® Institute. He has more than twenty years of experience in credit risk management, both as a consultant and as a user at financial institutions. He played a key role in developing SAS® Credit Scoring and continues to provide worldwide support for the initiative.

• Acknowledgments xiii Chapter 1 Introduction 1Scorecards: General Overview 9Notes 18Chapter 2 Scorecard Development: The People and the Process 19Scorecard Development Roles 21Intelligent Scorecard Development 31Scorecard Development and Implementation Process: Overview 31Notes 34Chapter 3 Designing the Infrastructure for Scorecard Development 35Data Gathering and Organization 39Creation of Modeling Data Sets 41Data Mining/Scorecard Development 41Validation/Backtesting 43Model Implementation 43Reporting and Analytics 44Note 44Chapter 4 Scorecard Development Process, Stage 1: Preliminaries and Planning 45Create Business Plan 46Create Project Plan 57Why “Scorecard” Format? 60Notes 61Chapter 5 Managing the Risks of In-House Scorecard Development 63Human Resource Risk 65Technology and Knowledge Stagnation Risk 68Chapter 6 Scorecard Development Process, Stage 2: Data Review and Project Parameters 73Data Availability and Quality Review 74Data Gathering for Definition of Project Parameters 77Defi nition of Project Parameters 78Segmentation 103Methodology 116Review of Implementation Plan 117Notes 118Chapter 7 Default Definition under Basel 119Introduction 120Default Event 121Prediction Horizon and Default Rate 124Validation of Default Rate and Recalibration 126Application Scoring and Basel II 128Summary 129Notes 130Chapter 8 Scorecard Development Process, Stage 3: Development Database Creation 131Development Sample Specification 132Sampling 140Development Data Collection and Construction 142Adjusting for Prior Probabilities 144Notes 148Chapter 9 Big Data: Emerging Technology for Today’s Credit Analyst 149The Four V’s of Big Data for Credit Scoring 150Credit Scoring and the Data Collection Process 158Credit Scoring in the Era of Big Data 159Ethical Considerations of Credit Scoring in the Era of Big Data 164Conclusion 170Notes 171Chapter 10 Scorecard Development Process, Stage 4: Scorecard Development 173Explore Data 175Missing Values and Outliers 175Correlation 178Initial Characteristic Analysis 179Preliminary Scorecard 200Reject Inference 215Final Scorecard Production 236Choosing a Scorecard 246Validation 258Notes 262Chapter 11 Scorecard Development Process, Stage 5: Scorecard Management Reports 265Gains Table 267Characteristic Reports 273Chapter 12 Scorecard Development Process, Stage 6: Scorecard Implementation 275Pre-implementation Validation 276Strategy Development 291Notes 318Chapter 13 Validating Generic Vendor Scorecards 319Introduction 320Vendor Management Considerations 323Vendor Model Purpose 326Model Estimation Methodology 331Validation Assessment 337Vendor Model Implementation and Deployment 340Considerations for Ongoing Monitoring 341Ongoing Quality Assurance of the Vendor 351Get Involved 352Appendix: Key Considerations for Vendor Scorecard Validations 353Notes 355Chapter 14 Scorecard Development Process, Stage 7: Post-implementation 359Scorecard and Portfolio Monitoring Reports 360Reacting to Changes 377Review 399Notes 401Appendix A: Common Variables Used in Credit Scoring 403Appendix B: End-to-End Example of Scorecard Creation 411Bibliography 417About the Author 425About the Contributing Authors 427Index 429

NAEEM SIDDIQI is the Director of Credit Scoring and Decisioning with SAS® Institute. He has more than twenty years of experience in credit risk management, both as a consultant and as a user at financial institutions. He played a key role in developing SAS® Credit Scoring and continues to provide worldwide support for the initiative.

• Acknowledgments xiii Chapter 1 Introduction 1Scorecards: General Overview 9Notes 18Chapter 2 Scorecard Development: The People and the Process 19Scorecard Development Roles 21Intelligent Scorecard Development 31Scorecard Development and Implementation Process: Overview 31Notes 34Chapter 3 Designing the Infrastructure for Scorecard Development 35Data Gathering and Organization 39Creation of Modeling Data Sets 41Data Mining/Scorecard Development 41Validation/Backtesting 43Model Implementation 43Reporting and Analytics 44Note 44Chapter 4 Scorecard Development Process, Stage 1: Preliminaries and Planning 45Create Business Plan 46Create Project Plan 57Why “Scorecard” Format? 60Notes 61Chapter 5 Managing the Risks of In-House Scorecard Development 63Human Resource Risk 65Technology and Knowledge Stagnation Risk 68Chapter 6 Scorecard Development Process, Stage 2: Data Review and Project Parameters 73Data Availability and Quality Review 74Data Gathering for Definition of Project Parameters 77Defi nition of Project Parameters 78Segmentation 103Methodology 116Review of Implementation Plan 117Notes 118Chapter 7 Default Definition under Basel 119Introduction 120Default Event 121Prediction Horizon and Default Rate 124Validation of Default Rate and Recalibration 126Application Scoring and Basel II 128Summary 129Notes 130Chapter 8 Scorecard Development Process, Stage 3: Development Database Creation 131Development Sample Specification 132Sampling 140Development Data Collection and Construction 142Adjusting for Prior Probabilities 144Notes 148Chapter 9 Big Data: Emerging Technology for Today’s Credit Analyst 149The Four V’s of Big Data for Credit Scoring 150Credit Scoring and the Data Collection Process 158Credit Scoring in the Era of Big Data 159Ethical Considerations of Credit Scoring in the Era of Big Data 164Conclusion 170Notes 171Chapter 10 Scorecard Development Process, Stage 4: Scorecard Development 173Explore Data 175Missing Values and Outliers 175Correlation 178Initial Characteristic Analysis 179Preliminary Scorecard 200Reject Inference 215Final Scorecard Production 236Choosing a Scorecard 246Validation 258Notes 262Chapter 11 Scorecard Development Process, Stage 5: Scorecard Management Reports 265Gains Table 267Characteristic Reports 273Chapter 12 Scorecard Development Process, Stage 6: Scorecard Implementation 275Pre-implementation Validation 276Strategy Development 291Notes 318Chapter 13 Validating Generic Vendor Scorecards 319Introduction 320Vendor Management Considerations 323Vendor Model Purpose 326Model Estimation Methodology 331Validation Assessment 337Vendor Model Implementation and Deployment 340Considerations for Ongoing Monitoring 341Ongoing Quality Assurance of the Vendor 351Get Involved 352Appendix: Key Considerations for Vendor Scorecard Validations 353Notes 355Chapter 14 Scorecard Development Process, Stage 7: Post-implementation 359Scorecard and Portfolio Monitoring Reports 360Reacting to Changes 377Review 399Notes 401Appendix A: Common Variables Used in Credit Scoring 403Appendix B: End-to-End Example of Scorecard Creation 411Bibliography 417About the Author 425About the Contributing Authors 427Index 429