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

A credit card issuer compares the score distribution of recent applicants with that of the development sample using the population stability index (PSI). Across bands, PSI is computed as the sum of (actual% - expected%) x ln(actual%/expected%). The result is 0.32. Under common industry rules of thumb, what is the most appropriate conclusion?

A PSI of 0.32 exceeds the usual 0.25 threshold, signaling a significant population shift from the development sample. The bank should investigate the cause and probably recalibrate or redevelop the scorecard. PSI measures distribution drift, not ranking power or the default rate itself.

  1. AThe population has shifted significantly, so investigate and likely recalibrate or redevelop the scorecardCorrect
  2. BThe population is stable, so no action is needed
  3. CThe scorecard has lost all discriminatory power and must be withdrawn immediately
  4. DThe default rate has increased by 32%

Explanation

Common thresholds: below 0.10 stable, 0.10 to 0.25 modest shift, above 0.25 significant shift. At 0.32 the shift is significant and warrants investigation and likely recalibration. PSI measures population change, not discrimination or the default rate directly.

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