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FRM Part I · FRM Exam Part I · External and Internal Credit Ratings

A bank's internal rating model uses a two-step approach: a quantitative scorecard produces a score, then credit officers may override it by up to two notches with documented reasons. In validation, which finding would be MOST concerning regarding the integrity of the rating system?

The most concerning finding is that 60% of ratings are overridden, almost all upward and for the largest clients. This pattern points to incentive-driven bias that undermines objectivity and makes the grade PD calibration unreliable, unlike infrequent, balanced, documented and independently reviewed overrides.

  1. AOverrides are used in about 5% of cases and are evenly split between upgrades and downgrades
  2. BOverrides are documented and reviewed by an independent credit risk function
  3. COverrides are used in 60% of cases and almost all are upgrades for the relationship managers' largest clientsCorrect
  4. DThe scorecard's discriminatory power, measured by the accuracy ratio, is stable over time

Explanation

Frequent, one-directional overrides concentrated in clients that matter to the business suggest incentive-driven bias and undermine the model's objectivity and the calibration of PDs. The other options describe normal, controlled use of judgment or healthy model performance.

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