Affiliations: [a] Department of Statistics, Temple University, Philadelphia, PA, USA | [b] Department of Risk Management, Barclays Bank, Wilmington, DE, USA | [c] Department of Mathematics and Computer Science, Valparaiso University, Valparaiso, IN, USA
Corresponding author: Hui Gong, Department of Mathematics and Computer Science, Valparaiso University, Valparaiso, IN 46383, USA. E-mail: [email protected].
Abstract: The financial crisis usually brings the deterioration of the customers' credits. For any financial institute, it's of importance to assess an applicant's credit in a proper way. Not too strict to lose potential customer; and not too loose to cause future loss. This paper focuses on the credit assessment and locates an optimal threshold, based on maximizing the expected profit. This threshold decides whether credits will be granted. The Profit Function is applied to derive this optimal threshold. The Normal-Normal model is assumed for the Good and Bad groups, which are assigned by their past 12 months Net Cash Flow. An empirical example of payoff matrices is used to demonstrate this optimal threshold.