Abstract
Once a scoring model has been developed for use in assessing a borrower’s credit risk, under the internal ratings-based (IRB) approach, it must be calibrated to a real-world measure of default frequency. The conservativeness of the calibration is tightly controlled, if it is not violated in the allowed number of digits of the rating scale, only then the model is authorized for use. If violated, the calibration probability of default must be raised, placing additional strain on the bank’s capital and reserves. In the presented paper, two new methods to improve the calibration accuracy are proposed. The methods have been tested in practice and provide significantly positive results in certain segments of the loan portfolio.
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