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FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management

A bank validating its retail PD scorecard finds that it ranks borrowers well, with a high Gini coefficient, but the predicted default rate for the portfolio is consistently 40% below the realized default rate. Which conclusion is most appropriate?

Discriminatory power is good but calibration is poor. A high Gini shows the scorecard ranks risk well, while predicted defaults 40% below realized defaults show PD levels are understated. The remedy is recalibrating the score-to-PD mapping.

  1. ADiscriminatory power is good but calibration is poor and needs recalibrationCorrect
  2. BBoth discriminatory power and calibration are poor
  3. CCalibration is good but discriminatory power is poor
  4. DThe model is overfitted and must be rebuilt with fewer variables

Explanation

A high Gini shows the model separates good from bad borrowers well. A persistent gap between predicted and realized default rates indicates miscalibrated PD levels, which can be fixed by recalibrating the score-to-PD mapping rather than rebuilding the ranking.

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