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

A card issuer finds that its scorecard, built three years ago, still ranks customers well (stable Gini) but the observed default rate in the 600-620 score band is 6%, versus 3% predicted at development. What is the most appropriate conclusion and action?

Discrimination is intact, as shown by the stable Gini, but calibration has drifted because observed defaults of 6% are double the predicted 3%. The appropriate action is to recalibrate the mapping from score to probability of default rather than rebuild the whole scorecard.

  1. ADiscrimination is intact but calibration has drifted, so recalibrate the score-to-PD mappingCorrect
  2. BThe scorecard has lost discriminatory power and must be fully rebuilt with new characteristics
  3. CThe population stability index must be zero, so no action is needed
  4. DThe scorecard is overfitted, so remove the highest-weighted variables

Explanation

A stable Gini indicates ranking ability is retained, while the observed default rate being double the predicted rate shows the PD levels are miscalibrated, e.g. from macroeconomic shifts. The appropriate response is recalibration of the score-to-PD mapping. A full rebuild is not required, and the data do not imply zero population shift or overfitting.

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