FRM Part II · FRM Exam Part II · The Financial Stability Implications of Artificial Intelligence
A bank's board wants to reduce exposure to AI service provider concentration without abandoning AI. Which action is most consistent with good practice discussed in the context of AI and financial stability?
The best action is to map critical dependencies, including fourth-party and cloud layers, set concentration tolerances, and prepare tested exit and substitution plans. This keeps AI benefits while limiting concentration and lock-in, whereas single-provider standardisation or contractual delegation leaves the bank exposed and still accountable.
- AStandardise all critical functions on a single provider to simplify oversight
- BMap critical dependencies, including fourth-party and cloud layers, set concentration tolerances, and develop tested exit and substitution plansCorrect
- CDelegate all responsibility for AI risk to the vendor through the contract
- DStop monitoring vendor performance once the onboarding due diligence is complete
Explanation
Effective management starts with identifying the full dependency chain, including subcontractors, then setting tolerances and preparing exit and substitution options. Single-provider standardisation increases concentration, and the firm cannot transfer accountability to the vendor. Onboarding-only diligence ignores ongoing risk.
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