Forecasting creditworthiness in retail banking: a comparison of cascade correlation neural networks, CART and logistic regression scoring models

The preoccupation with modelling credit scoring systems including their relevance to forecasting and decision making in the financial sector has been with developed countries whilst developing countries have been largely neglected. The focus of our investigation is the Cameroonian commercial banking sector with implications for fellow members of the Banque des Etats de L’Afrique Centrale (BEAC) family which apply the same system. We investigate their currently used approaches to assessing personal loans and we construct appropriate scoring models. Three statistical modelling scoring techniques are applied, namely Logistic Regression (LR), Classification and Regression Tree (CART) and Cascade Correlation Neural Network (CCNN). To compare various scoring models’ performances we use Average Correct Classification (ACC) rates, error rates, ROC curve and GINI coefficient as evaluation criteria. The results demonstrate that a reduction in terms of forecasting power from 15.69% default cases under the current system, to 3.34% based on the best scoring model, namely CART can be achieved. The predictive capabilities of all three models are rated as at least very good using GINI coefficient; and rated excellent using the ROC curve for both CART and CCNN. It should be emphasised that in terms of prediction rate, CCNN is superior to the other techniques investigated in this paper. Also, a sensitivity analysis of the variables identifies borrower’s account functioning, previous occupation, guarantees, car ownership, and loan purpose as key variables in the forecasting and decision making process which are at the heart of overall credit policy

Credit Risk Scoring: A Stacking Generalization Approach

Dissertation presented as the partial requirement for obtaining a Master's degree in Statistics and Information Management, specialization in Risk Analysis and ManagementCredit risk regulation has been receiving tremendous attention, as a result of the effects of the latest global financial crisis. According to the developments made in the Internal Rating Based approach, under the Basel guidelines, banks are allowed to use internal risk measures as key drivers to assess the possibility to grant a loan to an applicant. Credit scoring is a statistical approach used for evaluating potential loan applications in both financial and banking institutions. When applying for a loan, an applicant must fill out an application form detailing its characteristics (e.g., income, marital status, and loan purpose) that will serve as contributions to a credit scoring model which produces a score that is used to determine whether a loan should be granted or not. This enables faster and consistent credit approvals and the reduction of bad debt. Currently, many machine learning and statistical approaches such as logistic regression and tree-based algorithms have been used individually for credit scoring models. Newer contemporary machine learning techniques can outperform classic methods by simply combining models. This dissertation intends to be an empirical study on a publicly available bank loan dataset to study banking loan default, using ensemble-based techniques to increase model robustness and predictive power. The proposed ensemble method is based on stacking generalization an extension of various preceding studies that used different techniques to further enhance the model predictive capabilities. The results show that combining different models provides a great deal of flexibility to credit scoring models

An academic review: applications of data mining techniques in finance industry

With the development of Internet techniques, data volumes are doubling every two years, faster than predicted by Moore’s Law. Big Data Analytics becomes particularly important for enterprise business. Modern computational technologies will provide effective tools to help understand hugely accumulated data and leverage this information to get insights into the finance industry. In order to get actionable insights into the business, data has become most valuable asset of financial organisations, as there are no physical products in finance industry to manufacture. This is where data mining techniques come to their rescue by allowing access to the right information at the right time. These techniques are used by the finance industry in various areas such as fraud detection, intelligent forecasting, credit rating, loan management, customer profiling, money laundering, marketing and prediction of price movements to name a few. This work aims to survey the research on data mining techniques applied to the finance industry from 2010 to 2015.The review finds that Stock prediction and Credit rating have received most attention of researchers, compared to Loan prediction, Money Laundering and Time Series prediction. Due to the dynamics, uncertainty and variety of data, nonlinear mapping techniques have been deeply studied than linear techniques. Also it has been proved that hybrid methods are more accurate in prediction, closely followed by Neural Network technique. This survey could provide a clue of applications of data mining techniques for finance industry, and a summary of methodologies for researchers in this area. Especially, it could provide a good vision of Data Mining Techniques in computational finance for beginners who want to work in the field of computational finance

Technologies for climate change adaptation: agricultural sector

This Guidebook presents a selection of technologies for climate change adaptation in the agricultural sector. A set of twenty two adaptation technologies are showcased that are primarily based on the principals of agroecology, but also include scientific technologies of climate and biological sciences complemented with important sociological and institutional capacity building processes that are required to make adaptation function. The technologies cover monitoring and forecasting the climate, sustainable water use and management, soil management, sustainable crop management, seed conservation, sustainable forest management and sustainable livestock management. Technologies that tend to homogenize the natural environment and agricultural production have low possibilities of success in conditions of environmental stress that are likely to result from climate change. On the other hand, technologies that allow for, and indeed promote, diversity are more likely to provide a strategy which strengthens agricultural production in the face of uncertain future climate change scenarios. In this sense, the twenty two technologies showcased in this Guidebook have been selected because they facilitate the conservation and restoration of diversity while at the same time providing opportunities for increasing agricultural productivity. Many of these technologies are not new to agricultural production practices, but they are implemented based on assessment of current and possible future impacts of climate change in a particular location. Agro-ecology is an approach that encompasses concepts of sustainable production and biodiversity promotion and therefore provides a useful framework for identifying and selecting appropriate adaptation technologies for the agricultural sector. The Guidebook provides a systematic analysis of the most relevant information available on climate change adaptation technologies in the agriculture sector. It has been compiled based on a literature review of key publications, journal articles, and e-platforms, and by drawing on documented experiences sourced from a range of organizations working on projects and programmes concerned with climate change adaptation technologies in the agricultural sector. Its geographic scope is focused on developing countries where high levels of poverty, agricultural production, climate variability and biological diversity currently intersect. Key concepts around climate change adaptation are not universally agreed. It is therefore important to understand local contexts – especially social and cultural norms - when working with national and sub-national stakeholders to make informed decisions about appropriate technology options. Thus, decision-making processes should be participative, facilitated, and consensus-building oriented and should be based on the following key guiding principles: increasing awareness and knowledge, strengthening institutions, protecting natural resources, providing financial assistance and developing context-specific strategies. For decision-making the Community–Based Adaptation framework is proposed for creating inclusive governance that engages a range of stakeholders directly with local or district government and national coordinating bodies, and facilitates participatory planning, monitoring and implementation of adaptation activities. Seven criteria are suggested for the prioritization of adaptation technologies: (i) The extent to which the technology maintains or strengthens biological diversity and is environmentally sustainable; (ii) The extent to which the technology facilitates access to information systems and awareness of climate change information; (iii) Whether the technology support water, carbon and nutrient cycles and enables stable and/or increased productivity; (iv) Income-generating potential, cost-benefit analysis and contribution to improved equity; (v) Respect for cultural diversity and facilitation of inter-cultural exchange; (vi) Potential for integration into regional and national policies and can be scaled-up; (vii) The extent to which the technology builds formal and information institutions and social networks. Finally, recommendations are set out for practitioners and policy makers: • There is an urgent need for improved climate modelling and forecasting which can provide a basis for informed decision-making and the implementation of adaptation strategies. This should include traditional knowledge. • Information is also required to better understand the behaviour of plants, animals, pests and diseases as they react to climate change. • Potential changes in economic and social systems in the future under different climate scenarios should also be investigated so that the implications of adaptation strategy and planning choices are better understood. • It is important to secure effective flows of information through appropriate dissemination channels. This is vital for building adaptive capacity and decision-making processes. • Improved analysis of adaptation technologies is required to show how they can contribute to building adaptive capacity and resilience in the agricultural sector. This information needs to be compiled and disseminated for a range of stakeholders from local to national level. • Relationships between policy makers, researchers and communities should be built so that technologies and planning processes are developed in partnership, responding to producers’ needs and integrating their knowledge

Predicting employee absenteeism for cost effective interventions

This paper describes a decision support system designed for a Belgian Human Resource (HR) and Well-Being Service Provider. Their goal is to improve health and well-being in the workplace, and to this end, the task is to identify groups of employees at risk of sickness absence who can then be targeted with interventions aiming to reduce or prevent absences. To facilitate deployment, we apply a range of existing machine-learning methods to obtain predictions at monthly intervals using real HR and payroll data that contains no health-related predictors. We model employee absence as a binary classification problem with loss asymmetry and conceptualise a misclassification cost matrix of employee sickness absence. Model performance is evaluated using cost-based metrics, which have intuitive interpretation. We also demonstrate how this problem can be approached when costs are unknown. The proposed flexible evaluation procedure is not restricted to a specific model or domain and can be applied to address other HR analytics questions when deployed. Our approach of considering a wider range of methods and cost-based performance evaluation is novel in the domain of absenteeism prediction.publishedVersio

P.P.R working papers : catalog of numbers 1to 200

This paper contains a numerical listing of working papers produced by the Policy, Planning, and Research Complex. Each citation contains a brief abstract, and the contact point for the paper.Environmental Economics&Policies,Economic Theory&Research,Achieving Shared Growth,Banks&Banking Reform,Poverty Assessment

How to deal with extreme cases for credit risk monitoring: a case study in a credit risk data science company

The Global Financial Crisis triggered a severe hold on credit lending due to the financial institutions’ inability to assess credit applicants risk levels properly. Based on U.S. data from Lending Club, we conducted a study to evaluate the consequences of including macroeconomic risk factors in individual credit application observations. Through historical scenario stress testing, we find that this approach results in an increase in performance for credit scoring models developed in a stable economic cycle and applied to a recession. The inclusion of macroeconomic indicators reveals potential for credit institutions to better absorb shocks derived from economic downturns

Basel II compliant credit risk modelling: model development for imbalanced credit scoring data sets, loss given default (LGD) and exposure at default (EAD)

The purpose of this thesis is to determine and to better inform industry practitioners to the most appropriate classification and regression techniques for modelling the three key credit risk components of the Basel II minimum capital requirement; probability of default (PD), loss given default (LGD), and exposure at default (EAD). The Basel II accord regulates risk and capital management requirements to ensure that a bank holds enough capital proportional to the exposed risk of its lending practices. Under the advanced internal ratings based (IRB) approach Basel II allows banks to develop their own empirical models based on historical data for each of PD, LGD and EAD.In this thesis, first the issue of imbalanced credit scoring data sets, a special case of PD modelling where the number of defaulting observations in a data set is much lower than the number of observations that do not default, is identified, and the suitability of various classification techniques are analysed and presented. As well as using traditional classification techniques this thesis also explores the suitability of gradient boosting, least square support vector machines and random forests as a form of classification. The second part of this thesis focuses on the prediction of LGD, which measures the economic loss, expressed as a percentage of the exposure, in case of default. In this thesis, various state-of-the-art regression techniques to model LGD are considered. In the final part of this thesis we investigate models for predicting the exposure at default (EAD). For off-balance-sheet items (for example credit cards) to calculate the EAD one requires the committed but unused loan amount times a credit conversion factor (CCF). Ordinary least squares (OLS), logistic and cumulative logistic regression models are analysed, as well as an OLS with Beta transformation model, with the main aim of finding the most robust and comprehensible model for the prediction of the CCF. Also a direct estimation of EAD, using an OLS model, will be analysed. All the models built and presented in this thesis have been applied to real-life data sets from major global banking institutions

Profiling for profit : a report on target marketing and profiling practices in the credit industry

This report examines how many businesses make significant investments to purchase and develop customer relationship management systems. Given such investments, information about these systems is not widely available, but some publicly available information gives indication of the extent, and purpose, of the use. Recognising that lenders use customer information and highly sophisticated systems to target their marketing strategies, is the first step towards ensuring that these practices are taken into account in the development of consumer policy and law reform. This research was funded by the consumer advisory panel of the Australian Securities and Investment Commission (ASIC)