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FRM Part I · FRM Exam Part I · External and Internal Credit Ratings

Which practice best illustrates the use of a 'rating override' within a bank's internal rating process, and why do banks typically monitor overrides?

A rating override occurs when a credit officer changes a model-generated grade using information the model does not capture. Banks monitor overrides because frequent or mostly upward overrides can reveal model weaknesses or incentive problems that undermine the reliability of the internal rating system.

  1. AA credit officer changes a model-generated grade based on information not captured by the model; overrides are monitored because excessive or one-directional overrides may signal weaknesses in the model or in incentivesCorrect
  2. BA regulator replaces the bank's grade with an external agency rating; overrides are monitored to ensure agency ratings are used
  3. CThe model automatically recalculates the grade each month; overrides are monitored to confirm the model ran on schedule
  4. DA borrower requests a better grade by posting collateral; overrides are monitored to ensure collateral is valued daily

Explanation

An override is a judgmental adjustment to a model output using information outside the model. Monitoring frequency, direction and performance of overrides reveals model deficiencies or potential bias in the rating process. The other options describe unrelated processes.

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