This paper presents a new technique for grouping retail loans into homogenous risk pools, which adheres to the provisions of Basel II. We use recursive partitioning and test it on a data set of approximately 413,000 auto loans. By classifying loans according to selective predictors of default,...

The key concept underlying the Basel II framework for risk measurement and corresponding equity capital standards is that the existing regulations pertaining to credit risk will be individualised through reference to the internal ratings of banks. In accordance with the regulatory guidelines,...