Credit Scoring & Probability of Default Flashcards
7 cards from real CCP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Credit Scoring & Probability of Default flashcards as text
A bank is building a PD model and must choose between a vintage analysis and a roll-rate analysis. What is the PRIMARY purpose of vintage analysis?
Answer: To track cohorts of loans originated in the same period and observe cumulative default rates over time
Vintage analysis groups loans by origination period and tracks their cumulative default performance, revealing seasoning curves and underwriting quality trends.
Under Basel III, what is the minimum PD floor that must be applied to retail exposures when using the Internal Ratings-Based (IRB) approach?
Answer: 0.03%
Basel III sets a minimum PD floor of 0.03% for retail exposures under the IRB approach to avoid unrealistically low capital charges.
What is the primary risk of using 'thin file' applicants (those with limited credit history) in scorecard development?
Answer: The model may be biased because their performance data is sparse or absent
Thin-file borrowers have insufficient historical data, so models built without accounting for them may perform poorly when applied to this segment.
A scorecard developer calculates an Information Value (IV) of 0.48 for a variable. How should this be interpreted?
Answer: Too strong — the variable is likely leaking target information and should be investigated
An IV above ~0.3–0.5 is often considered suspiciously high and may indicate target leakage or overfitting, requiring investigation before inclusion.
Which of the following credit bureau attributes is typically the STRONGEST predictor of default in a generic scorecard?
Answer: Worst delinquency in the past 24 months
Historical delinquency severity (worst status) is consistently found to be the single strongest predictor of future default in credit scoring research.
What does 'population stability index' (PSI) measure in credit scoring?
Answer: The shift in score distribution between development and current deployment populations
PSI compares score distributions at development versus current deployment to detect whether the population has shifted significantly, triggering model redevelopment needs.
In a credit scorecard, what is a 'characteristic' and what is an 'attribute'?
Answer: Characteristic = the predictor variable (e.g., delinquency history); attribute = a specific bin or category of that variable
In scorecard terminology, a characteristic is the input variable (e.g., 'months since last delinquency'), and each attribute is a distinct grouping or bin of that variable assigned scorecard points.