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

A retail bank validates a new application scorecard on a holdout sample. The Kolmogorov-Smirnov (KS) statistic is computed as the maximum separation between two cumulative distributions across score bands. Which pair of distributions does the KS statistic compare?

The KS statistic compares the cumulative score distribution of good accounts with that of bad accounts and reports the maximum gap between them. A larger gap means the scorecard separates defaulters from non-defaulters better. Comparing development and current populations is the stability index.

  1. ACumulative distribution of scores for goods and cumulative distribution of scores for badsCorrect
  2. BPredicted default probability and realized default rate in each score band
  3. CDevelopment sample score distribution and current sample score distribution
  4. DCumulative approved applicants and cumulative rejected applicants

Explanation

The KS statistic measures the maximum vertical distance between the cumulative score distributions of good and bad accounts. A larger value indicates better discrimination. Comparing development and current samples describes the population stability index, not KS.

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