FRM Part II · FRM Exam Part II · Governance
A bank's monitoring of its corporate rating system shows the following over three years: the rating grades' average PDs are stable, but the Gini coefficient fell from 0.72 to 0.58 and the share of obligors migrating by two or more notches rose sharply. Which interpretation and action is most appropriate?
Discriminatory power has deteriorated and rating stability has weakened, so the drivers should be investigated, the model recalibrated or redeveloped, and the findings escalated to governance bodies. Stable average PDs do not offset a fall in the Gini coefficient from 0.72 to 0.58, which signals weaker ranking of obligors.
- ADiscriminatory power has deteriorated and rating instability has risen; investigate model drivers and recalibration or redevelopment, and report to governance bodiesCorrect
- BCalibration is excellent because average PDs are stable, so no action is required
- CThe model has improved because more obligors migrate, showing better responsiveness
- DThe decline is purely a reporting artifact and should be ignored unless defaults increase
Explanation
The Gini coefficient measures ranking ability; a drop from 0.72 to 0.58 shows weaker discrimination. Higher multi-notch migration suggests unstable ratings. Stable average PDs do not prove accuracy at the obligor level, since ranking can worsen while the average stays flat. Governance should be informed and the model investigated and recalibrated or redeveloped.
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