Artificial intelligence : new data and new models in credit risk management

During the last decade, the increase in computational capacity, the consolidation of new data processing methodologies and the availability of access to new information concerning both individuals and organizations, aided by the widespread internet usage, has increased the development and implementation of artificial intelligence (AI) within companies. The application of AI techniques in the banking sector attracts wide interest as the extraction of information from data is inherent to banks. As matter of fact, for many years now models play a crucial role in several banks processes and are strictly regulated when they drive capital measurement processes. Among banks' risk models a special role is played by credit ones, as they manage the most relevant risk banks face and are often used in regulatory relevant processes. The new AI techniques, coupled with the usage of novel data, mostly unstructured ones related to borrowers' behaviors, allow for an improvement of the accuracy of credit risk models, that so far relied on structured internal and external data. This paper takes inspiration from the Position Paper Aifirm 33/2022 and its English published translation (Locatelli, Pepe, Salis (eds), 2022. The paper is focused on literature review regarding the most common AI models in use in credit risk management, also adding a regulatory perspective due to the specific regime banking models are subject when they are used for regulatory purposes. Furthermore, the exploration of forthcoming challenges and future advancements considers a managerial perspective. It aims to uncover how credit risk managers can leverage the new AI toolbox and novel data to enhance the credit risk models' predictive power, without overlooking the intrinsic problems associated with the interpretability of the results.