Calibrating Credit Scorecards to External Ratings

Summary

The document discusses how to align an expert-based internal scorecard for commercial loans with external agency rating categories. It suggests ordinal logistic regression when agency rating category is the target, since ratings are ordered categories rather than ordinary numeric measurements. The fitted model predicts a category from the scorecard criteria.

As an alternative, the document proposes predicting an internal default flag or default rate, then mapping that estimated risk to agency categories using default rates. It points to regulatory guidance as a source for further considerations, but does not detail the calibration process, sample requirements, validation methods, or issues such as rating migrations and agency-specific definitions. The proposed approaches are brief options for framing the modeling task, not a complete methodology or evidence that a particular model will produce reliable rating alignment.

Key ideas

• Ordinal logistic regression can model agency rating categories as an ordered outcome.
• An internal default indicator can instead be modeled to estimate default risk.
• Estimated default rates can then be mapped to external rating categories.
• The document notes that rating alignment involves additional considerations beyond choosing regression weights.

Tags

# Mapping internal ratings to external ratings for a scorecard


# Mapping internal ratings to external ratings for a scorecard












I am building an internal rating model for commercial loans relying on expert-based scorecards. The ultimate goal of the exercise is to develop the model so that it maps with credit rating agencies' ratings. I am not an expert at all on that so i don't know how to calibrate the model i am building so that an S&P AAA-rated loan is given the highest score in my model. Do you think i would need to develop a regression to determine the weights of each criterion in my scorecard or is it more complex? Sorry to appear uninformed but i am learning as i am doing.

## Answer by Magic is in the chain (score 3)

https://quant.stackexchange.com/a/46777

Assume your outcome/dependant variable is the rating agencies rating category, say 10 to 20 rating categories, you can use ordinal logistic regression which is more natural for this kinda problem. So the model will predict the rating category.

If your dependant variable is the internal default flag then you can have your model predict the default rate and then you can map the outcome of the model to the agencies' categories based on default rates. The EBA technical standards document on the subject discusses some of the potential issues/considerations: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R1799&from=EN

Hope this helps.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.