4M ANALYTICS: Credit Risk

Banks often rely on an "originator" that seeks out borrowers whom it then connects with the bank. An originator develops local customers, solicits applications, and man ages the review process. By relying on an originator to generate new loans, a bank reduces

its need for expensive branch offices, yet retains a large, diverse portfolio of loans. The originator receives a percentage of the face value of the loan at the time the loan begins.

Unless a bank is careful, however, an originator may not be thorough in its review of applications; the loans may be riskier than the bank would prefer. To monitor the origination process, the bank in this analysis has obtained the credit scores of a sample

of 215 individuals who applied for loans in the current week. A credit score is a numerical rating assigned to a borrower based on his or her financial history. The higher the score, the less likely it is that the borrower will default on the debt. The bank would like for the credit score of loans in this portfolio to average 650 or more.

This sample was drawn randomly from applications received from five originators identified for confidentiality as "a." "b,' "c," "d," and "e." (The bank cannot audit the credit history of every loan; if it did, it would reproduce the work of the originator and incur the associated costs.)

Method

1. Even if all of the originators meet the objective of a 620 average credit score, some may be producing better loans than others. How can the bank decide?

Basic Answer: Use simultaneous intervals that adjust for multiplicity.