Discussion on IRB verification method -Application of ROC method in risk management

Author(s): Zheng Dachuan

A complete credit risk management system includes not only methods of default probability forecasting but also rigorous verification processwhich is an important guarantee on banking effective operation. The traditional testing method based on the ‘50%’ critical point is not a reliable option. Criteria of ROC curve method is set to dynamic. The curve depicts the combination of false-alarmrate and the hit rates. Its result presented directly to the objective, and to avoid the conflicting between indicators. Through empirical analysis based on real data, ROC dynamic test is considered to be a more scientific test method

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