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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. Internal audit finds that the bank cannot see the training data or the model's internal workings. Which risk is most directly heightened by this lack of transparency, according to the financial stability discussion of AI?

Lack of visibility into training data and model workings makes outputs hard to validate and explain, which weakens model risk management. Shared vendor models also raise third-party dependence and correlated behaviour, so the other options point in the wrong direction.

  1. ADifficulty in validating and explaining model outputs, which weakens model risk managementCorrect
  2. BA reduction in the bank's operational reliance on external providers
  3. CLower correlation of decisions across institutions that use the same model
  4. DReduced exposure to data quality problems because the vendor owns the data

Explanation

Opaque, complex AI models are hard to explain and validate, so model risk governance is weakened. Option C is wrong because shared models tend to increase, not reduce, correlation of decisions. Using a vendor increases, not reduces, reliance on third parties.

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