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FRM Part II · FRM Exam Part II · The Financial Stability Implications of Artificial Intelligence

A bank deploys a third-party generative AI model to summarise credit files for underwriters. The vendor does not disclose training data or model architecture. Which risk is most directly heightened by this lack of transparency, as emphasised in the FSB's analysis of AI and financial stability?

The main risk is third-party dependency combined with model risk. Without access to training data or architecture, the bank cannot properly validate, explain or monitor the model's behaviour, which weakens governance and makes errors or biases harder to detect and control.

  1. AThird-party dependency and model risk, because the bank cannot fully validate or understand the modelCorrect
  2. BInterest rate risk in the banking book, because summaries affect loan pricing
  3. CSettlement risk, because summaries delay trade confirmations
  4. DReserve requirement risk, because AI use changes required central bank balances

Explanation

Opaque vendor models limit the bank's ability to validate, explain and monitor outputs, which raises both model risk and third-party dependency. The other options describe risks unrelated to model opacity.

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