Skip to content

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

A lender is deciding how to estimate default risk for two segments: (1) mid-sized listed manufacturing firms and (2) new-to-bank consumers applying for installment loans. Which approach is most appropriate?

Consumers should be scored with a bureau and application data scorecard, since they have no market prices or audited accounts. Listed firms can be assessed with rating or structural approaches using financial statements and equity market data. The method must match the data available for each borrower type.

  1. AUse a structural model based on equity prices for the consumers and a bureau-based scorecard for the listed firms
  2. BUse a bureau-based application scorecard for the consumers and a structural or rating-based approach using financial statements and market data for the listed firmsCorrect
  3. CUse the same logistic scorecard with identical variables for both because the statistical method is universal
  4. DUse only collateral value for both because default probability cannot be estimated

Explanation

Consumers lack equity prices or audited accounts, but credit bureau and application data supports statistical scorecards. Listed firms have financial statements and market prices that support rating or structural models. Option A swaps the approaches, and C ignores that predictor data differ across segments.

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