Consumer Leverage Modeling for Credit Risk Prediction
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Solution Overview
Problem
Current methods for predicting changes in consumer net non-collectibles are unreliable and inconsistent, hindering financial institutions' ability to timely adjust credit issuance and reduce losses.
Innovation Solution
A system and method that model consumer leverage by comparing the growth rates of spending and borrowing, determining a normalized ratio, and identifying its equilibrium to predict future changes in consumers' ability to repay debts and net non-collectibles, using aggregated data from a large number of consumers.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If known economic indicators and methods are used to predict consumer non-collectibles, then financial institutions can issue or retract credit based on market conditions, but the predictions are unreliable and inconsistent
Solution Approach 1:
The patent transforms traditional economic indicator methods by changing the parameters being measured - instead of using conventional indicators, it employs a leverage ratio comparing consumer borrowing growth to spending growth. This parameter transformation enables more reliable and precise predictions of consumer net non-collectibles, directly resolving the contradiction between prediction reliability and precision.
2Loss of time
If financial institutions wait for traditional economic indicators to signal changes, then they can react to market conditions, but they lose timely predictive advantage
Solution Approach 1:
The patent implements preliminary action by detecting changes in the leverage ratio before traditional economic indicators show market changes. By monitoring borrowing-to-spending growth ratios in advance, financial institutions can predict consumer net non-collectibles before they materialize, eliminating the time loss while maintaining high prediction reliability through the leading indicator approach.
3Productivity
If financial institutions issue more credit when economic indicators are good, then they can maximize lending opportunities, but they increase exposure to future non-collectibles
Solution Approach 1:
The patent implements a feedback mechanism by continuously monitoring the leverage ratio and using it to predict future consumer net non-collectibles. This feedback loop allows financial institutions to adjust credit issuance strategies in real-time based on predictive signals, maximizing credit productivity when conditions are favorable while minimizing financial losses by retracting or limiting credit when non-collectibles are predicted to increase.
Data Source
AI summary
Embodiments of the present invention relate to systems, methods and computer program products that model consumer leverage and provide a leading indicator that predicts increases or decreases in consumer net non-collectibles. To do so, for example, the present invention determines the growth of consumers' spending and borrowing, and tracks a relationship between the value of a ratio that compares consumers' spending and borrowing and the value of the equilibrium of the ratio that compares consumers' spending and borrowing. This relationship is then applied to predict changes in consumers' ability to repay borrowed funds and consumer net non-collectibles.