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

A bank's validation team finds that its application scorecard, built on data from an economic expansion, ranks borrowers well (high Gini) but the predicted default rates in each score band are consistently below realised rates after a downturn. Which conclusion is most appropriate?

Discriminatory power is intact but calibration is poor. The scorecard still ranks borrowers correctly, as shown by the high Gini, yet it underpredicts default rates after the downturn, so the score-to-PD mapping should be recalibrated rather than the whole model rebuilt.

  1. ADiscriminatory power is intact but calibration is poor, so the PD mapping should be recalibratedCorrect
  2. BThe model has lost rank-ordering ability and must be fully redeveloped
  3. CThe Gini coefficient is invalid because default rates have changed
  4. DCalibration is acceptable because ranking is preserved

Explanation

A high Gini shows rank-ordering works, but systematically understated default rates indicate miscalibration, typical of through-the-cycle versus expansion-period data. Recalibrating the score-to-PD mapping addresses this; full redevelopment is not required by the evidence.

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