Credit Risk Management Practice Exam

Which of the following is a type of credit risk scoring model?

1. Pooled models

2. Ad-hoc models

3. Trend analysis models

4. Model-free assessments

The correct answer is: Pooled models

Pooled models are indeed a recognized type of credit risk scoring model. They are built using historical data from a group of borrowers to predict the likelihood of default. This approach allows for more generalized predictions by applying insights from a larger dataset rather than narrowly focusing on individual cases. These models utilize statistical techniques to assess the relationship between various borrower characteristics and their credit performance, helping lenders make informed decisions. In contrast, ad-hoc models are typically developed for specific scenarios or issues without a standardized approach and may not generalize well across different datasets. Trend analysis models focus on identifying and analyzing historical changes over time rather than providing scoring based on borrower-specific characteristics or data points. Model-free assessments do not rely on traditional modeling techniques but instead could encompass qualitative evaluations or heuristics, which lack the systematic predictability of scored models like pooled models. Each of these alternatives plays a distinct role in the realm of credit risk but does not fit the criteria of a scoring model as directly as pooled models do.