Predicting Impact of Future Economic Fluctuations on Consumer Credit Risk
To meet the needs of lenders to have a reliable “crystal ball” into the impact of future changes in the economy on consumers, FICO introduces FICO® Score Economic Calibration Service. This new product allows lenders to better understand how different economic scenarios, provided by Moody’s Analytics, a leading economic forecasting firm, are likely to affect consumer credit portfolios in the future by simulating the impact on FICO® Scores and associated probability of default. These forecasted FICO Scores and associated probability of defaults are forecasted over the Federal Reserve Comprehensive Capital Analysis and Review (CCAR) mandated nine-quarter forward horizon.
FICO® Score Economic Calibration Service supports a bank’s efforts in making strategic capital planning decisions that can be implemented at both a portfolio level and individual account level by providing forward-looking odds-to-score relationships estimates based on multiple economic scenarios. FICO’s methodology incorporates regional economic indicators, provided by Moody’s Analytics, such as unemployment, GDP, interest rates and house price changes to model forecasted probabilities of default.
By incorporating Moody’s Analytics regionalized data, FICO Score Economic Calibration Service users will also have access to FICO® Score probability of defaults by industry type – auto, credit card and real estate at the national level, state level and the top 29 MSAs (metropolitan statistical area).
Based on past economic and consumer payment dynamics, FICO derives an empirical relationship between the default rates observed at different score ranges and historical changes in economic conditions, to project an expected odds-to-score outcome under those economic conditions. This sensitivity to economic risk drivers can support a lender in its benchmarking of internal models or incorporating forward-looking FICO® Scores into internal models.
FICO® Score Economic Calibration Service will be available through Moody’s Analytics Data Buffet.
For more information about Moody’s Analytics expanded and regionalized CCAR forecast scenarios, visit www.economy.com/ccar.
Source: FICO Press Release