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

A bank's market risk team observes that during recent volatility spikes, several AI-based trading desks across institutions sold the same assets within minutes of each other, widening bid-ask spreads. Which interpretation best fits the financial stability concern about AI raised in the FSB report?

The pattern reflects the concern that fast, similar automated responses amplify volatility and strain liquidity. When many AI-driven desks react to the same signals simultaneously, correlated selling pushes prices down and widens spreads, increasing systemic risk during stress.

  1. AModel diversity increased, so liquidity providers withdrew voluntarily
  2. BSpeed and similarity of automated responses can heighten market volatility and liquidity strain through correlated sellingCorrect
  3. CAI trading lowers the speed of price discovery, causing stale prices
  4. DCorrelated selling is only possible when human traders override the models

Explanation

The FSB highlights that AI-driven speed and uniformity of reactions can amplify volatility and cause liquidity to dry up in stress. Correlated, rapid selling is consistent with that channel. Human override is not required; the issue arises precisely from automated similar behavior.

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