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The relationship between default prediction and lending profits: Integrating ROC analysis and loan pricing [An article from: Journal of Banking and Finance] | ![The relationship between default prediction and lending profits: Integrating ROC analysis and loan pricing [An article from: Journal of Banking and Finance]](http://ecx.images-amazon.com/images/I/51ETCKXBK9L._SL160_.jpg)
 enlarge | Author: R.m. Stein
Publisher: Elsevier
Category: Book
Buy New: $10.95
Sales Rank: 5105707
Format: Html
Media: Digital
Publication Date: May 1, 2005
Availability: Available for download now
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Product Description
This digital document is a journal article from Journal of Banking and Finance, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.
Description:
In evaluating credit risk models, it is common to use metrics such as power curves and their associated statistics. However, power curves are not necessarily easily linked intuitively to common lending practices. Bankers often request a specific rule for defining a cut-off above which credit will be granted and below which it will be denied. In this paper we provide some quantitative insight into how such cut-offs can be developed. This framework accommodates real-world complications (e.g., ''relationship'' clients). We show that the simple cut-off approach can be extended to a more complete pricing approach that is more flexible and more profitable. We demonstrate that in general more powerful models are more profitable than weaker ones and we provide a simulation example. We also report results of another study that conservatively concludes a mid-sized bank might generate additional profits on the order of about $4.8 million per year after adopting a moderately more powerful model.
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