Overview of an Expert Judgement Model for SME and Commercial Customer Credit Risk

Building an Expert Judgement Credit Rating Tool for SME and Corporate Banking Customers

One of the key elements in improving the quality, consistency and efficiency of SME, and wider commercial and corporate banking, is the application of credit analysis and assessment tools. Sometimes called 'credit decisioning systems', these include a wide range of statistical and qualitative approaches. Increasingly these tools are also often demanded by regulators looking to implement improved capital management practices in their jurisdiction. In this case, we are going to take a deep dive into the expert judgement scorecard approach, in its many variations the most popular and practical approach for most commercial banks operating in most markets.

Overview of an Expert Judgement Model for SME & Commercial Customers

While there is no magic formula to developing an expert judgement credit rating tool for SME and commercial customers, there are some sound principles that most models adhere to. In the presentation below we take an overview of the GBRW approach, which attempts to distill the best approaches we have seen used successfully in banks around the world, and to reassemble them in an orderly and logical bundle. For the purposes of illustration, we will be using the GBRW model as a working prototype to explore some of the key concepts underpinning expert judgement rating in future posts.

However, every bank must take care to adapt and refine their own model to suit their own circumstances, considering the local business environment, the target market, and the internal characteristics of the bank itself. Remember, a key element of competitive advantage in SME banking is the ability to understand the risks of the target market better than competitors, to define a segmentation strategy and market positioning that plays to the distinct strengths and weaknesses of the bank, and to clearly differentiate their Customer Value Proposition. An expert judgement rating tool is not just a risk management tool. It is a marketing tool as well.

In the next post, we will be taking a walk through of a working prototype expert judgement model, including a screencast so we can really get to grips with how the different components fit together. This will form the foundation for exploring each element in greater detail during the rest of the series.