Skip to content

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

A bank's retail scorecard was developed in a benign economy and is now used in a downturn. Monitoring shows the Population Stability Index (PSI) of the score distribution is 0.32, while the Gini coefficient has fallen only slightly. Which interpretation and action is most appropriate under sound model risk management?

A PSI of 0.32 signals a significant population shift, so the bank should investigate its causes and consider recalibrating or redeveloping the model. Stable Gini shows ranking power but does not ensure the predicted default rates remain accurate under the changed population.

  1. AIgnore the PSI because Gini remains acceptable
  2. BConclude the model is fully valid and raise the cutoff immediately
  3. CTreat the PSI as a significant population shift, investigate drivers, and consider recalibration or redevelopmentCorrect
  4. DReplace PSI with a larger development sample and take no further action

Explanation

A PSI above about 0.25 is conventionally a major shift in the applicant population. Stable ranking power (Gini) does not guarantee calibrated default probabilities, so the shift should be investigated and recalibration considered. Ignoring it or changing cutoffs without analysis is poor practice.

Did you get it right without looking?

One question tells you little. A timed set on Credit Scoring and Retail Credit Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise Credit Scoring and Retail Credit Risk ManagementFree diagnostic mock

More Credit Scoring and Retail Credit Risk Management questions