Credit card risk underestimated, leading to potential financial disasters.
Credit scoring models are commonly used to assess credit applications and categorize accounts by risk. A study used simulations to analyze expected loss distributions for a credit card portfolio under Basel II guidelines. The results revealed that risk groups based on default probability estimates may not be as distinct as thought. Including uncertainties in model estimation, exposure at default, and loss given default in the analysis showed that extreme credit risk could be underestimated when not considering these factors.