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FRM Part II · FRM Exam Part II · Credit Scoring and Rating

A bank monitors its application scorecard using the population stability index (PSI) computed across score bands, comparing current applicants with the development sample. The PSI is found to be 0.31. Using the common industry rule of thumb, what is the most appropriate conclusion?

A PSI of 0.31 exceeds the usual 0.25 threshold and signals a significant population shift. The scorecard should be investigated and probably recalibrated or rebuilt. PSI measures change in the score distribution, not directly a loss of discriminatory power such as Gini.

  1. AThe population is stable and no action is required
  2. BThe shift is minor, so only the cutoff score should be re-examined next year
  3. CThe result shows the model's Gini coefficient has fallen by 31%
  4. DA significant population shift has occurred, so the scorecard should be investigated and likely recalibrated or redevelopedCorrect

Explanation

Common thresholds treat PSI below 0.10 as stable, 0.10 to 0.25 as a moderate shift needing monitoring, and above 0.25 as a significant shift. At 0.31 the applicant population differs materially from development, so the model's validity is in doubt. PSI measures distribution shift, not a change in Gini.

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