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

A risk analyst compares the score distribution of loan applicants at model development with the current quarter's applicants. Population Stability Index (PSI) is computed across score bands, and the result is 0.31. Which interpretation and action is most appropriate under common practice thresholds (below 0.10 stable, 0.10-0.25 moderate shift, above 0.25 significant shift)?

A PSI of 0.31 exceeds the common 0.25 threshold, signalling a significant shift in the applicant population since development. The analyst should investigate the causes and consider recalibrating or redeveloping the scorecard. PSI measures population stability, not discriminatory power, and does not require default data.

  1. AThe population has shifted significantly, so the analyst should investigate the drivers and consider recalibrating or redeveloping the scorecardCorrect
  2. BThe scorecard is stable, because PSI measures only rank-ordering power
  3. CThe scorecard's discriminatory power has improved, because PSI above 0.25 indicates higher Gini
  4. DThe result shows no action is needed, because PSI applies only to defaulted accounts

Explanation

A PSI of 0.31 exceeds 0.25, indicating a significant change in the applicant population relative to development. This calls for investigation and possibly recalibration or redevelopment. PSI is a stability measure of the population, not a measure of discrimination, and it does not use default outcomes.

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