Grading definition and masterscale in corporate and retail

My understanding is that banks usually will not consider a separate grading definition and master scale for their retail rating system. Unlike corporate, retail credit has a much more automated and systematic credit approval process where human judgement is rarely required.

Having said that, for the sake of reporting, you may try to map the retail rating scale to your corporate rating scale such that same grading definitions may be applicable to both type of exposures. For example,

AAA grade definition (PD 0.030% to 0.045%) is define as the highest credit quality. Exceptional capacity for timely fulfilment of financial obligations and most unlikely to be affected by any foreseeable adversity. Extremely strong financial condition and very positive non-financial factors.

However the definition contain terms that are specific to corporate such as ‘financials’. However ‘financials’ can also mean in the retail world, the capacity of the borrower i.e. income, asset to liabilities ratio, past performance behaviours, etc. and ‘Non-financials’ would represent information such as education level, time on books, age, etc.

Finally, it is highly likely that your bank will result in a concentration problem if the retail PD is to be mapped to your corporate or group master scale. Typically, the master scale are much broader in corporate than in retail resulting in concentration issues.

Hope this help! Good luck!

It is necessary to have separate scales for retail and corporates considering the expected differences in default rates. Else there is a risk that the entire retail portfolio may get mapped to a single corporate grade, which would defeat the purpose of grading.

Having said that, if the purpose is to see the grading of the overall exposure of the firm then it might make sense to ignore differences in nature of exposures (retail or corporate) and grade them on one scale. But I havent seen anyone doing this.

Hi can anyone share some knowledge on how to perform master scaling for PD estimated models?