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

A bank's risk committee notes that most of its AI-driven credit decisioning and trading analytics rely on foundation models hosted by the same two cloud and model providers used by many of its peers. According to the FSB's analysis of AI and financial stability, which vulnerability does this pattern most directly create?

The pattern creates third-party dependency and service provider concentration risk. When many institutions rely on the same few AI model and cloud providers, an outage, cyberattack or flaw at one provider can hit many firms simultaneously, creating systemic operational vulnerability rather than reducing risk.

  1. AHigher third-party dependency and service provider concentration, so a single provider failure or outage could affect many institutions at onceCorrect
  2. BLower operational risk because outsourced models are always better validated than in-house models
  3. CReduced market correlation because all firms use diverse and independent model outputs
  4. DElimination of model risk because the provider assumes all legal liability for outputs

Explanation

The FSB identifies third-party dependencies and service provider concentration as a key AI-related vulnerability, since a few providers supply models, data and cloud infrastructure. A failure or compromise at one provider can propagate across many firms. The other options claim risk reduction that the analysis does not support.

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