Q: Is borrower good or bad?
A: Is he capable to survive lending period. With how big probability of default?
Q: Techniques?
A: External by credit agencies or FICO scores and internal by lenders (corporate or retail). Corporates are using Altman's Z-score, Merton's default model for listed companies ...., retail is using Linear discriminant analysis and Non-linear PD regression
Q: Credit rating agencies?
A:
GLOBAL
Moody's www.moodys.com, Standard&Poor's www2.standardandpors.com, Fitch www.fitchratings.com
disadvantage on local markets, like China, as they are not allowed to see all the data by China government
SPECIAL
A.M. Best www.ambest.com, Dagong Global Credit Rating dagongcredit.com/dagongweb/english/index.php
Q: Rating scores?
A: AAA, AA, A, BBB, BB, B, CCC, CC, C (from best to worst), probability of default within 1 year / 3 years AAA-0.0033% / 0.1% , AA-0.033% / 0.25% , A-0.0834% / 0.25% , BBB-0.3345% / 1.00% , BB-2.5652% / 7.5% , B-7.1682% / 20% , CCC-15.8567% / 40% , CC-29.5270% / 65% , C-63.1597% / 95%
Q: AAA corporates
A: only 4 in the world, Johnson & Johnson, Exxon Mobil, Microsoft, Automatic Data Processing
Q: FICO scores
A: TransUnion, Equifax, Experian, Dun & Bredstreet,
it is a combination of
a) payment history (35%) - delayed payments, lawsuit, bankruptcy, court orders,
b) credit utilization = outstanding debt / total credit limit (30%),
c) credit history (15%) - age of the oldest loan and average age of all loan accounts
d) credit experience (10%) - history in credit
e) recent inquiry (10%) - huge amount of loan application
Super prime ...... 740 - 850, Prime .... 680 - 739, Alt-A ..... 620 - 679, Subrpime .... 550 - 619, Deep subprime ..... 350 - 549
Q: FICO vs default in one year
A: 800 - 850 .... 1%, 750 - 799 .... 2%, 5%, 14%, 31%, 51%, 70%, 83% for 350 - 499
PD = Normsdist(-0.009FICO+0.0508)
it is possible to check your FICO data on internet (http://www.fico.com/en/Products/Scoring/Pages/default.aspx)
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