IMA Journal of Management Mathematics (2006) 17, 25–46
Advance Access publication on May 20, 2005
Credit risk assessment: a challenge for financial institutions
Association of Greek Insurance Companies, Xenofontos 10, Athens, 10557, Greace
MARY E. THOMSON
Department of Psychology, Glasgow Caledonian University, Department of Psychology,
Cowcaddens Road, Glasgow G4 0BA, UK
[Received on 8 March 2004; accepted on 17 February 2005]
This study explores financial credit risk assessment. This is an important issue because there is cur-
rently no standardized method used by financial institutions for the assessment of credit risk. A critical
evaluation of the most popular credit risk assessment methods—the judgmental method, credit-scoring
and portfolio models—highlights a number of limitations when used on their own. Several interviewees
confirm that credit risk assessment methods should be combined for effective credit risk assessment.
Accordingly, the study proposes a framework for improving credit risk assessment, which combines the
strengths of these methods and copes successfully with their limitations.
Keywords: judgmental method; credit-scoring models; portfolio models.
Risk management is an area that has become increasingly important. Businesses compete aggressively
for more market and business share and consequently they take on more risks. Therefore, the implemen-
tation of risk management within businesses is crucial. Risk management attempts to eradicate, reduce
and manage risks and to increase the benefits and avoid harm from taking risks (Waring & Glendon,
1998). In the financial sector, risk management is an area of high interest due to the financial crises of
the last two decades (Galindo & Tamayo, 2000). These crises occurred for various reasons but accord-
ing to the Basle Committee, the international banking supervisory body, the largest source of serious
banking problems is credit risk, the risk of counterparty default. Serious financ