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

A bank's board wants governance over its growing use of AI models in lending, trading and fraud detection. Which approach is most consistent with the governance expectations discussed for AI in finance?

The bank should apply its existing model risk management framework and add AI-specific controls such as explainability, data lineage, bias testing and human oversight. Ongoing monitoring is needed because models retrain, and accountability cannot be outsourced to vendors.

  1. ADelegate all AI oversight to the vendor providing the models
  2. BApply existing model risk management principles, extended with AI-specific controls such as explainability, data lineage, bias testing and human oversightCorrect
  3. CExempt AI models from validation because they retrain automatically
  4. DLimit governance to a one-time approval before deployment

Explanation

Authorities stress that existing model risk frameworks apply to AI and need strengthening for opacity, data and bias. Retraining models need more ongoing validation, not less. Vendor delegation and one-time approval leave accountability gaps.

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