2. Regulatory Background

There is a long tradition of rating agencies grading firms that issue bonds. This aims primarily at facilitating the decision making of investors. Very roughly, the rating methodology applied by the agencies could be decribed as expert judgment that is based on hard as well as on soft facts.

Credit institutions have another 50 years long tradition of scoring borrowers. This way, the credit institutions want to support credit decisions, i.e. decisions to grant credit or not. With regard to scoring, the predominant methodology applied by the credit institutions could roughly be described as using statistically based score variables.

In the past, rating and scoring were regarded as being rather different concepts. This was partly caused by the fact that rating and scoring respectively are usually applied to populations with rather different characteristics. Ratings are most frequently used for pricing of bonds issued by larger corporates. Score variables are primarily used for retail credit granting.

But, also the background of the developers of rating methodologies and scoring methodologies, respectively, is usually quite different. Rating systems are often developed by experienced practitioners, whereas the development of score variables tends to be conferred on experts in statistics.

With the rising of modern credit risk management, a more unified view of rating and scoring has become common. This is related to the fact that today both rating and score systems are primarily used for determining PDs of borrowers. PDs are the crucial determinants for pricing and granting credit as well...