Reference

Credit risk glossary

Plain-language definitions for common credit-risk parameters, accounting concepts, scorecard methods, and validation metrics.

Credit risk: The possibility of loss when a borrower or counterparty fails to meet a contractual obligation.
Obligor: A borrower or counterparty whose credit quality or default risk is assessed.
Facility: A contractual credit arrangement, such as a loan, card account, or committed line.
Portfolio: A defined group of credit exposures analyzed together under stated inclusion rules.
Risk appetite: The amount and types of risk an organization is prepared to accept while pursuing its objectives.
Default: A defined credit event used for measurement; the exact triggers depend on the applicable accounting, regulatory, or internal policy.
Days past due (DPD): The number of days a contractual payment remains unpaid after its due date, under a stated counting convention.
Cure: A return from default or delinquency status under a defined policy and observation period.
Re-default: A later default after an account previously met the defined cure or return-to-performing criteria.
Collateral: Property or another asset pledged to support repayment or recovery after borrower default.
Haircut: A reduction applied to a stated asset or collateral value to reflect valuation, realization, or uncertainty assumptions.
Data quality: The degree to which data is fit for a defined use, assessed through properties such as completeness, validity, consistency, uniqueness, accuracy, and timeliness.
Probability of default (PD): The probability that a defined borrower or exposure defaults within a specified horizon under stated assumptions.
One-year PD: A PD measure over a one-year horizon, with the default definition, population, and conditioning stated.
Lifetime PD: A probability of default accumulated over the expected life of an instrument, using consistent conditional or marginal periods.
Conditional PD: The probability of default in a period conditional on the exposure having survived without default to that period's start.
Marginal PD: The unconditional probability of default in a particular period from the original cohort, often survival to period start multiplied by conditional PD.
Cumulative PD: The probability that default has occurred by a given future time, calculated from period survival or event probabilities.
Survival probability: The probability an exposure has not experienced the defined event by a given time.
Hazard rate: A period-specific event rate or probability conditional on survival to the period, depending on model convention.
Transition matrix: A matrix of probabilities that a borrower moves between rating, delinquency, or default states over a defined interval.
Point-in-time (PIT) PD: A PD estimate designed to reflect current or near-term conditions under an institution's stated methodology.
Through-the-cycle (TTC) PD: A PD estimate intended to smooth or represent risk across a longer economic cycle, as specifically defined by the method.
Loss given default (LGD): The loss severity conditional on default, measured using stated exposure, recoveries, costs, timing, and discount conventions.
Exposure at default (EAD): An estimate of the exposure amount at the time a defined default event occurs.
Credit conversion factor (CCF): A factor used to estimate the portion of an undrawn commitment expected to be drawn by default under a specified method.
Effective interest rate (EIR): The rate used under the applicable financial-instrument accounting requirements to discount estimated cash flows, subject to specific rules.
Discount factor: A multiplier that converts a future cash flow to a present value using a stated rate and time convention.
Expected credit loss (ECL): A probability-weighted estimate of credit losses measured under the applicable accounting framework and horizon.
IFRS 9: The International Financial Reporting Standard for financial instruments, including classification, measurement, hedge accounting, and impairment requirements.
Stage 1: The general IFRS 9 impairment stage for exposures without a significant increase in credit risk since initial recognition, subject to detailed requirements and exceptions.
Stage 2: The general IFRS 9 impairment stage for exposures with a significant increase in credit risk since initial recognition, measured using lifetime ECL under the general model.
Stage 3: The general IFRS 9 impairment stage for credit-impaired financial assets, subject to the standard's detailed requirements.
12-month ECL: The portion of lifetime ECL associated with default events possible within the 12 months after the reporting date; it is not simply cash shortfalls occurring only in that year.
Lifetime ECL: Expected credit losses resulting from all possible default events over the expected life of the financial instrument under applicable requirements.
Significant increase in credit risk (SICR): An IFRS 9 assessment of the change in risk of default over the expected life since initial recognition, using applicable quantitative and qualitative evidence.
Forward-looking information: Reasonable and supportable information about future economic conditions considered in a measurement when the applicable framework requires it.
Scenario weighting: The probability weights assigned to alternative economic scenarios in a probability-weighted estimate; weights should be justified and sum to one.
Purchased or originated credit-impaired (POCI): A financial asset that is credit-impaired at initial recognition and follows specific IFRS 9 accounting treatment.
Write-off: A direct reduction of the gross carrying amount when there is no reasonable expectation of recovery, under an entity's approved policy and applicable requirements.
Credit scorecard: A structured mapping from defined applicant or account characteristics to a score or estimated risk measure.
Binning: Grouping continuous values or categories into intervals for analysis or model use.
Weight of Evidence (WOE): A log ratio comparing the distribution of goods and bads across a bin; its sign depends on the chosen convention.
Information Value (IV): A sum of bin-level class-share differences weighted by WOE, used as a descriptive separation statistic in some scorecard workflows.
Logistic regression: A generalized linear model that links predictors to the log-odds of a binary outcome and can produce probability estimates.
Score cut-off: A threshold on a score or risk estimate that separates actions under a defined decision policy.
Reject inference: Methods for estimating or adjusting for outcomes of declined applicants, whose repayment outcomes are not directly observed.
Calibration: Agreement between predicted probabilities and observed event frequencies for a matched population and horizon.
Discrimination: A model's ability to rank cases with different outcome risk, distinct from probability calibration.
ROC-AUC: Area under a receiver operating characteristic curve, summarizing ranking behavior across binary-classification thresholds.
Gini coefficient: A discrimination statistic often calculated as twice ROC-AUC minus one under a common credit-risk convention.
Kolmogorov–Smirnov (KS) statistic: The maximum separation between cumulative distributions of two groups, often default and non-default score distributions.
Precision: Among cases predicted positive at a threshold, the proportion that are truly positive under the defined label.
Recall: Among true positive cases, the proportion identified as positive at a threshold.
Brier score: The mean squared difference between binary outcomes and predicted probabilities; it reflects multiple aspects of probabilistic prediction quality.
Log loss: A probabilistic scoring rule that penalizes the negative log probability assigned to the observed class.
Observed-to-expected (O/E): A ratio of realized events to the sum of predicted event probabilities for a matched sample and horizon.
Population Stability Index (PSI): A binned divergence-style summary comparing a current population distribution with a reference distribution.
Characteristic Stability Index (CSI): A binned distribution comparison applied to one model input or characteristic.
Vintage analysis: Cohort tracking by origination or activation period to compare outcomes as accounts age.
Roll rate: The proportion of accounts or balances moving from one delinquency state to another over a stated interval.
Backtesting: A comparison of prior model forecasts or estimates with outcomes that later became observable.
Censoring: Incomplete observation of an event time, such as an account whose full performance horizon has not yet elapsed.
Data leakage: Use of information in development that would not be available at the intended scoring time or that improperly reveals the target.
Model risk: Potential adverse impact from errors, limitations, assumptions, implementation, or use of a model.
Independent validation: A review by qualified parties sufficiently independent of model development to assess conceptual soundness, implementation, and performance.
ECL overlay: A governed adjustment to model output for limitations or risks not adequately captured by the underlying calculation.
Prepayment: Repayment of a credit exposure earlier than its contractual schedule, which can affect expected life and exposure forecasts.