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

A financial stability authority wants early warning of AI-related vulnerabilities in the financial system. Consistent with the FSB's November 2024 report on the financial stability implications of AI, which approach to monitoring is most appropriate at this stage?

Authorities should close data gaps by developing indicators and collecting information on AI adoption, including reliance on third-party providers and concentration. This gives forward-looking visibility into vulnerabilities, unlike waiting for losses, relying on annual reports, or imposing bans.

  1. ARely solely on banks' own annual reports to identify AI usage
  2. BAddress data gaps by developing indicators and collecting information on AI use, including third-party and concentration exposuresCorrect
  3. CWait until AI-related losses appear in credit loss data before collecting information
  4. DBan financial institutions from using third-party AI models until monitoring is complete

Explanation

The FSB highlights data gaps and recommends that authorities enhance monitoring, including indicators and surveys of AI use and of third-party dependencies. Waiting for losses is reactive and unsuitable for early warning. Self-reporting alone is inconsistent and incomplete. A ban is not a monitoring approach and is not recommended.

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