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

A bank's retail scorecard was developed on data from an expansion period. Validation shows the Population Stability Index (PSI) between development and current applicants is 0.32, while the model's Gini coefficient on recent vintages has stayed close to its development value. What is the most appropriate interpretation and response?

A PSI of 0.32 indicates a significant population shift that warrants investigation of its causes and closer monitoring of calibration and performance. Recalibration or redevelopment follows if deterioration appears. A stable Gini alone is not sufficient reassurance, and PSI alone does not automatically invalidate the model.

  1. ANo action is needed because the Gini is stable
  2. BSignificant population shift has occurred; investigate drivers and monitor closely, and consider recalibration or redevelopment if performance or calibration deterioratesCorrect
  3. CImmediately replace the model since PSI above 0.25 proves the model is invalid
  4. DIgnore PSI because it only applies to commercial models

Explanation

A PSI above about 0.25 signals a significant shift in the applicant population. Stable discrimination (Gini) does not guarantee calibration or future performance, so the shift must be investigated and calibration checked. PSI alone does not prove invalidity, so automatic replacement is excessive.

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