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FRM Part II · FRM Exam Part II · Advances in Artificial Intelligence: Implications for Capital Markets Activities

A bank deploys several AI surveillance and trading models that were all fine-tuned from the same third-party foundation model. A risk manager is assessing the concentration implication for the firm and the wider market. Which conclusion is most appropriate?

A defect, bias or outage in the shared foundation model could hit every dependent model at once, producing correlated errors and third-party concentration risk. Fine-tuning on different data does not remove inherited weaknesses, and widespread use across firms raises rather than lowers systemic exposure.

  1. ADiversification is assured because each model is fine-tuned on different internal data
  2. BA flaw, bias or outage in the shared foundation model could affect all dependent models simultaneously, creating correlated errors and third-party concentration riskCorrect
  3. CConcentration risk applies only to hardware providers, not to models
  4. DShared models reduce operational risk because they are used by many firms

Explanation

Common upstream dependence creates a single point of failure and correlated behaviour across applications and institutions. Fine-tuning on separate data does not remove inherited flaws. Wide usage increases systemic exposure rather than reducing it.

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