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Risk factors are measures of particular loan characteristics that are deemed to be predictive of the risk of default on the loan. Thus, risk factors can include a very broad range of information relating to the customer, the economic or industry environment in which the customer is operating or the specific transaction or transactions that the customer is entering into.
Risk factors can be objective (from the perspective of the bank) such as those based on financial accounts or risk assessments from rating agencies. Risk factors can also be subjective, depending upon the opinion of the bank officers that are doing the risk assessment.
When defining a risk factor, the following information is captured:
A name is required for the risk factor. It should be unique among all of the risk factors that have been defined for the dataset.
A description of the risk factor is required, specifying exactly how it is to be measured. Such measurement detail would include the formula for a financial ratio or the policy guidelines for a subjective risk factor.
Risk factors can have one of 3 different data types. Specifically, risk factors can be specified to only take on integer values (..., -1, 0, 1 , ...), real values (decimal numbers), or a finite number of different text string values (known as enumerations). The choice of data type influences the way that risk factor values are presented to users and the validation rules that are applied to user choices. When a risk factor is given a data types of a "list of text values", then the risk factor definition form modifies to provide users with a dynamically extending list of fields in which the specific text values can be entered. If a text value is deleted then that field will disappear. If all of the fields are filled then additional fields will appear. When all of the required text values have been specified, click on the save button on the form to save the definition of the risk factor.
The data type of a risk factor can also be set equal to "heading" or "spacer". These choices can be used to help format the list of risk factors. For example, a heading can be used to label a group of related risk factors. A spacer can improve the presentation of risk factors by creating a gap between two different groups of risk factors.
The presentation of risk factors can also be enhanced through the use of specific colours for the text or background or the use of bold text. The risk factor definition provides mechanisms for controlling these formatting aspects of the risk factors. These choices impact on the way that the risk factors are presented to users when they are doing risk assessments.