Risk and risk management in the credit card industry

Florentin Butaru, Qingqing Chen, Brian Clark, Sanmay Das, Andrew Lo () and Akhtar Siddique

Journal of Banking & Finance, 2016, vol. 72, issue C, 218-239

Abstract: Using account-level credit card data from six major commercial banks from January 2009 to December 2013, we apply machine-learning techniques to combined consumer tradeline, credit bureau, and macroeconomic variables to predict delinquency. In addition to providing accurate measures of loss probabilities and credit risk, our models can also be used to analyze and compare risk management practices and the drivers of delinquency across banks. We find substantial heterogeneity in risk factors, sensitivities, and predictability of delinquency across banks, implying that no single model applies to all six institutions. We measure the efficacy of a bank's risk management process by the percentage of delinquent accounts that a bank manages effectively, and find that efficacy also varies widely across institutions. These results suggest the need for a more customized approached to the supervision and regulation of financial institutions, in which capital ratios, loss reserves, and other parameters are specified individually for each institution according to its credit risk model exposures and forecasts.

Keywords: Credit risk; Consumer finance; Credit card default model; Machine-learning (search for similar items in EconPapers)
JEL-codes: C55 D12 G17 G21 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

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Working Paper: Risk and Risk Management in the Credit Card Industry (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:72:y:2016:i:c:p:218-239

DOI: 10.1016/j.jbankfin.2016.07.015

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