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Credit Rating
1
Credit Rating and Scoring Models
Credit Rating
and
Scoring Models
Advances in Theory and Application
May 17-19, 2004
Hilton Mark Center Hotel
Alexandria, Virginia
Table of Contents
Welcome ......................... 2
Program Overview .......... 3
Session Detail ................. 4
Expert Proles .............. 14
Venue Information ........ 23 2
Credit Rating and Scoring Models
Welcome
W
elcome to
Credit Rating and Scoring Mod-
els: Advances in Theory and Application
,
a conference sponsored by The Ofce of the
Comptroller of the Currency (OCC). Thank
you for attending, we hope you nd the conference useful
and informative.
The use by banks of credit risk rating models has grown
tremendously in the last several years. Under the proposed
Basel II capital reforms, these models will only grow in
importance, as they lie at the core of the advanced internal
ratings-based (AIRB) approach to regulatory capital. The
primary purpose of this conference will be to advance the
theory and application of credit rating models, by allowing
researchers and practitioners to discuss recent innovations
in the design, implementation and validation of both retail
and commercial models. It is hoped that the meeting will
foster the building of ties between technical ratings experts
in banks, the vendor industry, academia, and the supervi-
sory community.
The Ofce of The Comptroller
of the Currency
The OCC was established in 1863 as a bureau of the U.S.
Department of the Treasury to charter, regulate, and
supervise all national banks. It also supervises the federal
branches and agencies of foreign banks. Headquartered in
Washington, D.C., the OCC has six district ofces plus an
ofce in London to supervise the international activities of
national banks.
The OCC is headed by the Comptroller, who is appointed
by the President, with the advice and consent of the Senate,
for a ve-year term. The Comptroller also serves as a direc-
tor of the Federal Deposit Insurance Corporation (FDIC)
and a director of the Neighborhood Reinvestment Corpora-
tion.
The OCCs nationwide staff of examiners conducts on-site
reviews of national banks and provides sustained supervi-
sion of bank operations. OCC staff and economists su-
pervise domestic and international activities of national
banks and perform corporate analyses. Examiners analyze a
banks loan and investment portfolios, funds management,
capital, earnings, liquidity, sensitivity to market risk, and
compliance with consumer banking laws, including the
Community Reinvestment Act. They review the banks in-
ternal controls, internal and external audit, and compliance
with law. They also evaluate bank managements ability to
identify and control risk.
The agency issues rules, legal interpretations, and corpo-
rate decisions concerning banking, bank investments, bank
community development activities, and other aspects of
bank operations. In regulating national banks, the OCC has
the power to:
Examine the banks.
Approve or deny applications for new charters,
branches, capital, or other changes in corporate or
banking structure.
Take supervisory actions against banks that do
not comply with laws and regulations or that oth-
erwise engage in unsound banking practices. The
agency can remove ofcers and directors, negotiate
agreements to change banking practices, and issue
cease and desist orders as well as civil money penal-
ties.
Issue rules and regulations governing bank
investments, lending, and other activities.
The OCC does not receive any appropriations from Con-
gress. Instead, its operations are funded primarily by
assessments on national banks. National banks pay for
their examinations, and they pay for the OCCs process-
ing of their corporate applications. The OCC also receives
revenue from its investment income, primarily from U.S.
Treasury securities.
An Important Note
The conference program organizers have worked hard
to put together a set of presentations that illustrate the
diversity of quantitative techniques that are being used to
analyze and model retail and corporate credit risk. Never-
theless, the fact that a particular presentation appears on
the program in no way implies that the OCC endorses or
approves of the techniques and methods described therein.
Statements made by presenters are their own, and in no
way should be taken to represent ofcial views of the Ofce
of the Comptroller of the Currency, The US Department of
the Treasury, or their staffs. 3
Credit Rating and Scoring Models
Welcome
Monday, 17 May
11:00am - 1:00pm
On-Site Registration
1:30pm
CONFERENCE OPENING
2:00pm - 4:30pm
SESSION I:
Perspectives on the State
of Credit Modeling
(A brief break will be held)
5:30pm - 7:30pm
Reception
Program Overview
Tuesday, 18 May
7:15am
Continental Breakfast
8:00am - 9:45am
SESSION II:
Methodological Innovations in
Rating and Scoring
9:45am - 10:00
Break and Refreshments
10:00am - 11:45am
SESSION III:
Frontiers of Applied Corporate
Credit Modeling
12:00pm - 1:20pm
Luncheon
1:30pm - 3:15pm
SESSION IV:
Understanding Reject Inference
3:15pm - 3:30pm
Break and Refreshments
3:30pm - 5:15pm
SESSION V:

Key Issues in Severity Modeling
6:15pm - 6:45pm
Social
6:45pm - 9:00pm
Banquet and
KEYNOTE ADDRESS
Wednesday, 19 May
7:15am
Continental Breakfast
8:00am - 9:45am
SESSION VI:

Using Scoring Tools to
Enhance Protability
9:45am - 10:00am
Break and Refreshments
10:00am - 11:45am
SESSION VII:

Understanding the Dynamics
of Ratings
12:00pm - 1:20pm
Luncheon
1:30pm - 3:15pm
SESSION VIII:
Model Validation Methodologies
3:15pm - 3:30pm
Break and Refreshments
3:30pm - 4:30pm
SESSION IX:

What Have We Learned?
A Panel Discussion
4:30pm
CONFERENCE CLOSING
CRSM Conference Rooms
All Sessions: Plaza Ballroom B&C, Lower Level
Lunches, Social and Banquet: The Magnolia Room, Upper Level
Registration, Reception, and Breakfasts: Plaza Ballroom Foyer, Lower Level 4
Credit Rating and Scoring Models
Monday, 17 May
CONFERENCE OPENING
C. Erik Larson Ofce of the Comptroller of the Currency, and
Nicholas Kiefer Cornell University and Ofce of the Comptroller of the Currency
Session Detail
The formerly obscure topic of bank internal credit rating
has garnered an increasing amount of attention, especially
from bank supervisors, because of the current movement
to change international bank regulatory capital standards.
The primary objective of the proposed capital reform is to
make commercial bank capital standards more sensitive to
differences in risk -- particularly credit risk. The proposed
approach is appealing because the capital requirement will
reect and be consistent with a banks internal assessments
of the credit risk of individual obligors and facilities.
Credit ratings and scores, however, are not objective facts,
readily determinable by all interested parties. Commer-
cial ratings and retail scores each are outputs of a process.
Whether the process is implemented though an empirically
derived model, the application of a set of decision rules,
or the exercise of expert judgment, it is subject to error or
even manipulation. Given possibility of error, or model
risk, we recognize the need to verify that the rating and
scoring process is sound and well deployed.
While banks have long used ratings, and other similar
devices, in internal risk management and decision making,
the stakes are now higher. Many stakeholders now have a
greater interest, not merely in the reliability of ratings as
rank ordering devices, but also in the consistency, accu-
racy, and veriability of those ratings. Thus, banks will be
expected to implement systems designed to validate rat-
ings. And banks supervisors will check the efcacy of those
validation systems.
The Interest of Bank Supervisors in Credit Rating
Jeffrey Brown Ofce of the Comptroller of the Currency
SESSION I: Perspectives on the State of Credit Modeling
Chair:
C. Erik Larson Ofce of the Comptroller of the Currency
John D. Hawke, Jr., was appointed the 28th
Comptroller of the Currency in December 1998.
Previously, Hawke served as Under Secretary
of The Treasury for Domestic Finance, where
he oversaw development of policy and legisla-
tion on nancial institutions, debt management,
and capital markets. Prior to joining Treasury,
Hawke was a senior partner and chairman at the
law rm of Arnold & Porter. He also has served
as general counsel to the Board of Governors
of the Federal Reserve System and as counsel
to the Select Subcommittee on Education in
the U.S. House of Representatives. Hawke has
written extensively on the regulation of nan-
cial institutions, and taught courses on banking
law at Georgetown and Boston Universities. He
served on a committee of inquiry appointed by
the Chicago Mercantile Exchange to study the
role of futures markets in the October 1987
stock market crash, and was a founding member
of the Shadow Financial Regulatory Committee.
Hawke holds a B.A. in English from Yale Univer-
sity and a law degree from the Columbia Univer-
sity School of Law.
Welcoming Remarks
John D. Hawke, JR. Comptroller of the Currency