How do machine learning and non-traditional data affect credit scoring? New evidence from a Chinese fintech firm

Leonardo Gambacorta, Yiping Huang, Han Qiu and Jingyi Wang

Journal of Financial Stability, 2024, vol. 73, issue C

Abstract: This paper compares the predictive power of credit scoring models based on machine learning techniques with that of traditional loss and default models. Using proprietary transaction-level data from a leading fintech company in China, we test the performance of different models to predict losses and defaults both in normal times and when the economy is subject to a shock. In particular, we analyse the case of an (exogenous) change in regulation policy on shadow banking in China that caused credit conditions to deteriorate. We find that the model based on machine learning and non-traditional data is better able to predict losses and defaults than traditional models in the presence of a negative shock to the aggregate credit supply. This result reflects a higher capacity of non-traditional data to capture relevant borrower characteristics and of machine learning techniques to better mine the non-linear relationship between variables in a period of stress.

Keywords: Fintech; Credit scoring; Non-traditional information; Machine learning; Credit risk (search for similar items in EconPapers)
JEL-codes: G17 G18 G23 G32 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: How do machine learning and non-traditional data affect credit scoring? New evidence from a Chinese fintech firm (2019)
Working Paper: How do machine learning and non-traditional data affect credit scoring? New evidence from a Chinese fintech firm (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:73:y:2024:i:c:s157230892400069x

DOI: 10.1016/j.jfs.2024.101284

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