2. Credit Scoring and Rating

Credit scoring usually refers to models and systems that provide a numerical credit score for each borrower, mostly for internal use by financial institutions and corporate clients. Credit ratings provide risk classifications for corporate loans, bond issues, and countries (e.g., sovereign credit ratings). This chapter describes the basic characteristics of both schemes. The presentation begins with a discussion of the different contexts of scoring and rating (through the cycle and point in time assessments, issuer ratings and issue-specific ratings, behavioral—profit scoring and social lending). Then, the main modeling requirements are outlined, and the model development process is explained. The chapter closes with a brief discussion of the credit rating industry, focusing on the major credit rating agencies (CRAs), who play a crucial role due to the globalization of the financial markets and the wide range of debt issues, which pose challenges to their monitoring and risk assessment for investors, financial institutions, supervisors, and other stakeholders.