The development of the LGD scoring model for a automotive captive finance company

Abstract

The aim of this thesis is to explain the process behind the development of a scoring model for the estimation of the loss given default for a captive leasing company of a German car manufacturer. The idea comes from the need of the leasing company to have a “streamlined” process for the evaluation of the clients in the acceptance stage of the leasing/loan. Part of this process deals with the estimation of a score for the LGD, which is the main focus of this thesis. The first part of the script is about the risk management and its development in the last thirty years, highlighting its growing importance and the changes of the banking regulations over these years. There is a focus on the Basel Committee and the Basel Agreements. Then in the second part the analysis is deeper about the credit risk and all its characteristics. Each component of it will be explained. The third part deals with the scoring models applied to estimate both the Probability of Default and the Loss Given Default. There is a focus on the most frequent used models of scoring used by the analysts. In the last part, the development of the new model is explained, in particular: the need of this new model, how the model works, how it was developed and the back testing that were made. In the end there is the analysis of the results.