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The time is NOW for model validation and adjustment.

One of the major premises used in credit scoring is that “the future is like the past”. It’s usually a rational assumption and gives us a reasonable platform on which to build scorecards whether they be application scorecards, behavioural scores, collection scores or financial models.  That is reasonable until something unprecedented comes along.  You can read about this black swan event in our previous two blogs here and here

In those blogs we covered how and where we believe models will be affected by the COVID 19 crisis.  We also went into more detail in a follow-up VLOG series, COVID 19-in-Credit on our YouTube channel. Be sure to check them out if you have not already.

So, what do we do when the future is not like the past?  As the COVID-19 crisis continues to grip local and global economies, so the credit consumer’s behaviours are changing. Many have lost or will lose their jobs, many more have had their income reduced.  Some businesses will collapse during the shock period (first 3 months); others will collapse during the immediate aftermath; many others will need to and may fail to adapt to the new-normal – what ever that might be in their industry.

What is clear is customer behaviour is likely to change and we expect that most models will be heavily affected over the next six months. So, what’s to be done? At Principa we advocate the following 3 step process:

  1. Validate
  2. Re-calibrate
  3. Accommodate


All models and strategies should be validated during this time. This involves understanding the current environment with, for example, payment holidays and stressed economic conditions; looking at the scores and model variables; and looking at how the models are being used.  Recommendations can be drawn from the score distribution stability, character stability, risk-based-pricing strategies, IFRS9 flow-rates comparisons, etc. A plan also needs to be drawn up to understand how the models should be adjusted and how they should be used in the short, medium and longer term.


One of the major anticipated trends is the score-to-odds shift of models.  All of this is going to mean the anticipated bad-rates are going to be higher at any given score.  As strategies have been set on expected bad-rates, so the scores will need to be re-aligned or re-calibrated to represent the expected score-to-odds relationship. These could be through linear-alignments, step-wise alignments or non-linear alignments. Most scorecards expect a significant performance period (12 months being the most common). We can’t obviously wait 12 months before acting, so instead we need to work off proxies. Proxies can be drawn in many ways dependent on the scorecard. For behavioural scorecards – instead of 3+ ever at 12 months you may consider looking at a 2+ ever at 3 months as an example. The definition you settle on will be dependent on many factors. Use your vintages as a guide.


It may be that certain scores will weaken during this time with significant volatility expected. That’s not to say the models will not work at all. Strategies should therefore be amended to accommodate the weakened models. There will be more manual overrides expected in, for example, originations or with IFRS9 models.  When setting your strategies or running provisions, generate various scenarios to help better understand the implication of the changes.  Be careful not to double-count during this time.

Call to action

The time is NOW to address your models and how to best navigate this crisis.  Get in touch with us. We have over 20 years of experience in helping companies charter through market uncertainty in scorecards, strategies and financial models. We could help you too. It’s time to act. The future may not be currently like the past, but as the inspirational quote goes “The past is in your head, the future is in your hands.”

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